Premium, discount and equilibrium: the reference range and the OTE

After structure, liquidity, order blocks and FVGs, the fifth element of the "vocabulary" is the position of price inside a range: is it expensive or cheap relative to the last big move? The concept is very old (Fibonacci has been used since the nineties) but the SMC/ICT terminology of premium and discount makes it a simple, powerful filter. Let's see how to build it and, above all, what to honestly say about the evidence.

The dealing range: where to start

The dealing range is the price interval between two significant extremes: for example the last swing low and the last swing high that defined the main move. The choice of extremes matters a lot, so it must be written down:

• Uptrend: from the protected low (which originated the last high) to the high.
• Downtrend: from the protected high to the low.
• Sideways range: from the low to the high of the range.

With different extremes, the "50%" changes. Rule: decide in advance, per timeframe, how to select the extremes (for example "the last swing with n = 7 and amplitude ≥ 2 × ATR").

Equilibrium, premium and discount

Divide the range in half:

• Equilibrium (EQ): the 50% level.
• Premium: the upper half (above 50%): price is "expensive" relative to the range.
• Discount: the lower half (below 50%): price is "cheap".

The operational rule that follows, simple and widespread:

• Buys preferably in discount.
• Sells preferably in premium.

It's a version of the old principle "buy low, sell high", with an objective level (the 50%) as the watershed. Its practical value lies more in avoiding the worst entries (buying at the top of the range, selling at the bottom) than in finding perfect entries.

Optimal Trade Entry (OTE)

The OTE is the retracement zone between 62% and 79% of the move (with 70.5% often given as the central level). They are Fibonacci levels (0.618 and about 0.79; 0.705 is the average). The practical logic: a deep retracement allows a very short stop relative to a long target, hence an excellent risk/reward.

How it's built (uptrend):

1. Draw the Fibonacci from the protected low to the high.
2. The OTE zone is between 0.618 and 0.79 of retracement (that is in deep discount).
3. Look for an entry in that zone with LTF confirmation.

What we really know about the levels

It must be said clearly:

• There is no solid evidence that the 0.618, 0.705 and 0.79 levels have greater predictive power than nearby levels (for example 0.6 or 0.75) or random ones. Research on Fibonacci retracements gives mixed results.
• The OTE's practical merit is to provide a clear, repeatable entry criterion with a short stop, not to be "magic".
• Very deep retracements (beyond 79-100%) mean the structure is about to be invalidated: if price goes beyond the protected low, the idea is wrong, and the stop says so.
• The flip side: waiting for the OTE means skipping many moves that don't retrace that deep (price restarts sooner). It's a trade-off (fewer entries, but better?): it must be measured.

Measuring: the test you must do

Suggested experiment on at least 100 retracements (after BOS) of a pair:

1. For each bullish impulse, record the maximum depth of the retracement (as % of the impulse) before price makes a new high.
2. Derive the distribution: what percentage of retracements stops below 38%? between 38 and 50? between 50 and 62? in the OTE (62-79)? beyond 79?
3. Calculate, for an entry rule at the various levels (with stop below the protected low and target at the high), which offers the best expectancy.

A counterintuitive result often emerges: very deep entries have a better R:R but fewer fills (price doesn't arrive), shallower ones have more fills but a lower R:R. Finding the optimal compromise on your instrument is what makes the difference, and it's not a universal rule.

Premium/discount as a multi-timeframe filter

You can calculate the dealing range on different timeframes: for example weekly, daily, H4 range. An entry in discount on both the H4 and the D1 has (in the hypothesis) more consistency than one in discount on the H4 but in premium on the D1. In practice: the high timeframe defines the bias, the medium one the area.

In short

• The dealing range goes from the protected low to the high (or vice versa), chosen with a written rule.
• Premium above 50%, discount below: buys in discount, sells in premium, as a filter.
• The OTE is the 62-79% zone (centre 70.5%): entries with a short stop and good R:R, but less frequent.
• There's no evidence those levels are magic: measure the distribution of retracements on your data.
• Use it as a filter/penalty, not as an absolute ban.

Practical exercise

1. On 100 historical retracements measure the depth in % and derive the distribution.
2. Calculate expectancy (stop below the protected low, target at the high) for entries at 38%, 50%, 62%, 70.5% and 79%.
3. Compare premium/discount of the H4 with that of the D1: is there a difference in results?