For example, in our ICU, the patient condition is listed as:
Fair, Poor, Guarded, or Critical
Think of it as an answer to a questionnaire:
How likely is this patient to recover with no complications?
Likely, Somewhat Likely, Unlikely, Very Unlikely
If your patient is unlikely to recover without complications, then his prognosis is guarded.
This is used only on admission (in my unit) to assess how unstable or sick the patient really is and how much care they are anticipated to need. It's also probably used for insurance purposes (i.e. justifying a transfer to the ICU), but I'm not sure. The patient's condition, and thus their prognosis may be constantly changing.