Premium, discount and equilibrium

The reference range

Take the last significant move, from low to high (or vice versa), and split it in half with a tool such as Fibonacci. The midpoint is the equilibrium (50%).

Premium and discount

• Above 50%: premium, an 'expensive' zone where, with a bearish view, you look for sells
• Below 50%: discount, a 'cheap' zone where, with a bullish view, you look for buys

Optimal Trade Entry (OTE)

In the ICT approach the OTE is the retracement zone between 62% and 79% of the move (with 70.5% often given as the central level). These are Fibonacci levels chosen because they often coincide with a good risk/reward: short stop, long target.

There is no evidence that these specific levels have more predictive power than others; their practical merit is giving a clear, repeatable entry criterion.

Practical rule

Avoid buying in premium and selling in discount, unless you are deliberately trading a reversal. This filter removes many low-quality entries.

Exercise

• For 30 historical setups note whether the entry was in premium or discount relative to the H4 range
• Compare the average result (in R) of the two groups: is there a difference?