In ICT (Inner Circle Trader) trading strategies, identifying premium and discount zones is a key concept in evaluating optimal trade entries based on price levels.
These zones help traders understand where to look for high-probability buy and sell opportunities by identifying areas where price is either “cheap” (discount) or “expensive” (premium) relative to its range.
1. Understanding Premium and Discount Zones in ICT
1. Discount Zone:
This is a price level in the lower half of a price range, where buying opportunities are considered favorable.
A discount zone is where the price is seen as undervalued or at a “discount.” Traders typically look for buying opportunities here.
2. Premium Zone:
This is a price level in the upper half of a price range, where selling opportunities are favorable.
A premium zone is where the price is seen as overvalued or at a “premium.”
Traders typically look for selling opportunities here.
2. Identifying Premium and Discount Zones Using Fibonacci Retracement in ICT
In ICT, traders often use Fibonacci retracement to establish premium and discount levels within a range.
The 50% retracement level is particularly crucial as it serves as the dividing line between the premium and discount zones.
1. Steps to Identify Premium and Discount Zones:
1. Determine the Range:
Identify the recent high and low within the timeframe you are trading.
2. Plot the Fibonacci Retracement Tool:
Apply the Fibonacci tool from the high to the low (or vice versa) of the range.
3. 50% Level as Midpoint:
The 50% retracement line divides the range into premium (above 50%) and discount (below 50%) zones.
- Discount Zone: 0% to 50% of the range.
- Premium Zone: 50% to 100% of the range.
3. Examples of Premium and Discount Zones in Practice in ICT
Let’s say we’re analyzing the GBP/USD currency pair.
Example 1: Identifying a Discount Zone for a Buying Opportunity
1. Scenario:
The GBP/USD has made a swing low at 1.2000 and a swing high at 1.2400.
2. Fibonacci Levels:
Apply the Fibonacci retracement from 1.2000 to 1.2400.
3. Interpretation:
The area between 1.2000 (0%) and 1.2200 (50%) is considered the discount zone.
Traders would look for buying setups, such as bullish reversal patterns or ICT order blocks, in this range to enter long trades.
4. Example in Action:
If GBP/USD retraces from 1.2400 and drops to 1.2150, it enters the discount zone, which may provide an ideal level for a buy.
Traders might wait for additional confirmation (e.g., price action signals or a liquidity sweep) before entering the trade.
Example 2: Identifying a Premium Zone for a Selling Opportunity
1. Scenario:
The same GBP/USD pair creates a swing low at 1.2000 and a swing high at 1.2400.
2. Fibonacci Levels:
The premium zone lies between 1.2200 (50%) and 1.2400 (100%).
3. Interpretation:
The area above the 50% level (1.2200) up to the high (1.2400) is the premium zone.
Traders may seek selling opportunities in this area, expecting the price to reverse as it enters a perceived overbought or “premium” level.
4. Example in Action:
If GBP/USD retraces from 1.2000 to 1.2350, this entry within the premium zone offers a potential selling opportunity if other ICT criteria confirm a bearish setup.
4. Why Premium and Discount Zones Matter in ICT
Premium and discount zones reflect the psychological aspect of value trading.
When price is in the discount zone, institutions may see it as undervalued and more likely to buy.
When price enters the premium zone, institutions may view it as overvalued and potentially look to sell or take profits.
These zones allow ICT traders to align their entries with institutional behavior, avoiding retail traps and improving their risk-reward ratios.
1. Practical Trading Strategy Using Premium and Discount Zones
1. Identify Market Structure:
Determine the current trend and identify the swing high and low within the trading timeframe.
2. Apply Premium and Discount Zones:
Plot the 50% level and look for price to enter either the premium or discount zone.
3. Look for Confluence:
Seek other signals in these zones (e.g., order blocks, liquidity sweeps, or fair value gaps) to confirm the potential entry.
4. Manage Risk:
Set stop losses around the recent swing high (for shorts) or swing low (for longs) and target price moves that align with the range structure.
5. Additional Example: EUR/USD Using Premium and Discount Zones in a Downtrend in ICT
1. Scenario:
Suppose EUR/USD is in a downtrend with a recent swing high at 1.1500 and a swing low at 1.1200.
2. Fibonacci Application:
Plot the Fibonacci from 1.1500 (high) to 1.1200 (low).
3. Interpretation:
The discount zone lies between 1.1200 and 1.1350.
The premium zone lies between 1.1350 and 1.1500.
4. In Action:
If price retraces to 1.1450, it is within the premium zone, potentially signaling a selling opportunity.
If an order block or liquidity raid also occurs in this area, it strengthens the short signal.
Traders can look to enter short positions with a target near the recent swing low or a fair value gap below.
6. Summary of Premium and Discount Zones in ICT
| Zone | Range % | Ideal Trade Direction |
|---|---|---|
| Discount Zone | 0% to 50% | Buy Opportunities |
| Premium Zone | 50% to 100% | Sell Opportunities |
Understanding premium and discount zones allows ICT traders to identify strategic entry points in line with institutional price behavior.
By applying these zones, traders can enhance their ability to enter trades with confidence, using price action that aligns with larger market trends and institutional flow.
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