The Ultimate Guide to Premium & Discount
Using the Equilibrium Line Correctly
Many traders discuss premium and discount, but few truly understand how to apply these concepts effectively. Most rely on Fibonacci retracements drawn arbitrarily on price swings, hoping for reactions at the 61.8% level. This approach lacks structure and context. To trade Smart Money Concepts properly, you must identify where value lies in the market and position yourself accordingly.
This guide focuses on mastering the premium vs. discount framework using:
- A higher timeframe bias (4H)
- Entries on the 1H or 15M charts
- Trade refinements based exclusively on Fair Value Gaps (FVGs)
No order blocks. No guesswork. Just clear structure, displacement, and institutional logic.
Step 1: Define a Valid 4H Dealing Range
Your analysis begins on the 4H chart, where you establish the dealing range—a price leg that caused a significant market structure shift, confirmed by displacement and a swing break.
Key Steps:
1. Identify the Range: Locate a 4H swing high to swing low (or vice versa) that broke structure and created an imbalance.
2. Anchor the Range: Mark the extremes (swing point to the opposite extreme)—this defines your dealing range.
3. Mark the 50% Level: This midpoint is your equilibrium line.
- Premium: Prices above the 50% level (expensive).
- Discount: Prices below the 50% level (cheap).
This isn’t about retracement levels; it’s about separating cheap from expensive price zones.
Why Premium & Discount Matter
Institutions buy at discount (accumulation) and sell at premium (distribution). They avoid mid-range positions. Your framework:
- Discount Zone (Below 50%): Look for buy setups.
- Premium Zone (Above 50%): Look for sell setups.
Trading against this logic (e.g., longing in premium or shorting in discount) means opposing smart money.
Step 2: Refine Entries Using Fair Value Gaps (1H/15M)
Once price enters your target zone (premium/discount), switch to lower timeframes (1H/15M) and focus only on FVGs—areas where price moved aggressively, leaving inefficiency (imbalance).
Entry Rules:
1. Displacement Required: Price must break short-term structure, creating a clear FVG.
2. Retest the FVG: Wait for price to return into the gap.
3. Enter in the Upper/Lower Third: Depending on direction (long/short).
4. Invalidation: The high/low of the displacement move.
FVGs provide high-probability, structured entries aligned with institutional activity.
Trade Examples
Long from Discount:
- 4H Context: Price is in discount within a bullish range.
- 15M Setup: A sharp rise breaks structure, leaving an FVG.
- Entry: Retest of the FVG with confirmation (e.g., reaction wicks, volume).
- Target: Next liquidity pool in premium (e.g., prior highs).
#### Short from Premium:
- 4H Context: Price is in premium within a bearish range.
- 15M Setup: A strong drop forms an FVG.
- Entry: Retracement into the FVG.
- Target: Nearest discount liquidity (e.g., old lows).
Rules for High-Probability FVG Entries
1. Displacement Origin: FVGs must form from a strong break of structure.
2. Zone Alignment: Only trade FVGs within 4H premium/discount zones.
3. Avoid Chop: Ignore FVGs in mid-range or choppy price action.
4. Higher Timeframe Confirmation: The 4H trend must support your direction.
This eliminates 90% of weak setups.
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Exiting with Institutional Logic
- Longs in Discount: Take profits at premium zones (old highs, equal highs).
- Shorts in Premium: Take profits at discount zones (old lows, unfilled FVGs).
This ensures you exit where reversals are likely, avoiding overstaying trades.
Conclusion
Trading premium/discount zones isn’t just theory—it’s a structured way to align with institutional flow. Combine it with FVGs for clean, high-probability setups.
Summary:
1. Bias & Range: Define 4H dealing ranges and equilibrium.
2. Zone Focus: Only trade premium (sells) or discount (buys).
3. FVG Entries: Use displacement-generated gaps on 1H/15M.
4. Liquidity Targets: Exit at opposing zones.
Stay disciplined, and you’ll stop chasing price—instead, you’ll trade where true value exists.
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