Price the win, stall, and loss before a stock entry

Frame the strategy as if-then rules

A strategy is framed as if-then rules for instrument type, market conditions, and trade qualifiers. An if-then rule is a written condition that authorizes a long or short action only after a stated price or context fact is observed. The same framing must account for both win potential and loss magnitude.

Build the decision tree from session facts

A decision tree is an ordered set of price, range, and context observations that generate the if-then branches for a single-stock or hedged setup. Inputs listed for those rules include the prior close, prior high and low, five-, ten-, or twenty-day highs and lows, pivot and projected levels, the current session open, high, and low, and a percentage of average true range.

Example branches cover a gap-fill toward the prior close, a staircase of higher opens and closes judged against a pivot and a 35 percent average true range band, and a retest of a twenty-day high or low after a breakout or breakdown. An average true range band is a volatility-scaled distance from a pivot or reference level used to locate an entry zone rather than a fixed price offset.

Grade how the loss is treated

Three graded approaches are contrasted. The first is entering with no loss plan. The second is placing a stop 0.50 from entry. The third is assigning probabilities to a gain, a sideways outcome, and a decline before computing expected value.

Expected value is defined as win probability times win amount minus loss probability times loss amount. It is presented as the trade expectation rather than the hoped-for profit.

Weight win, stall, and loss into expected value

In the worked long example, a 50 percent chance of a 1.00 gain, a 20 percent chance of no movement, and a 30 percent chance of a 0.50 decline produce an expected value of 0.35. That figure is treated as a positive expectation rather than the original 1.00 target.

A probability cannot be assigned from the setup alone. The path of the stock and the state of the market, sector, and industry group, plus variance and volatility, are required inputs.

Use expected value after the risk-reward ratio

Support-and-resistance risk-reward ratios are progress toward considering loss size. A risk-reward ratio is a static comparison of planned profit distance to planned loss distance off a level, and it is treated as incomplete until probabilities are attached. Expected value is presented as the step that improves on a standardized risk-reward ratio.