Understanding Premium and Discount in Trading

Oct 13, 2024

ICT Mentorship Lesson 6.1 (January 2017)

Overview

  • Focus on defining high timeframe Premium and Discount (PD) arrays.
  • Consideration of support/resistance and valuation of price as high/low in trading.
  • Usage of an algorithmic approach to understand price as a premium or discount.

Key Concepts

Price Evaluation

  • Traders and algorithms evaluate price as either:
    • Cheap (support)
    • Expensive (resistance)

Retail Trading Challenge

  • Ambiguity in retail trading about what constitutes resistance/support.
  • Importance of having a structured approach to framing trades using PD arrays.

Hierarchy in Using PD Arrays

  • Remove ambiguity by understanding the hierarchy of tools for trade framing.
  • Different technical analysis methods yield different retracement expectations (Fibonacci, Elliott Wave, etc.).

Premium and Discount Concept

  • Higher timeframe charts used to establish whether the market is at a premium or a discount.
  • Premium = resistance or overvaluation.
  • Discount = support or undervaluation.

Price Movement Analysis

  • Price moves from discount to premium and vice versa.
  • Understanding and expecting price reactions at resistance levels.

Tools and Techniques

ICT Tools

  • Use common ICT tools to interpret charts and patterns.
  • Lesson aims to teach framing PD arrays on higher timeframe charts.

Chart Analysis

  • Considering whether price is in a premium or discount market.
  • Utilize monthly and weekly charts to determine context.

Trading Strategy

  • Look for price swings and analyze support/resistance levels across timeframes.
  • Utilize equilibrium concept (midpoint between high and low).

Arrays and Hierarchy

Premium Arrays

  1. Old High/Low
  2. Rejection Block
  3. Bearish Order Block
  4. Fair Value Gap
  5. Liquidity Void
  6. Bearish Breaker
  7. Mitigation Block

Discount Arrays

  1. Mitigation Block
  2. Bullish Breaker
  3. Liquidity Void
  4. Fair Value Gap
  5. Bullish Order Block
  6. Rejection Block
  7. Old Low/High

Application on Different Timeframes

  • Monthly, weekly, and daily charts maintain the same hierarchy.
  • Importance of understanding which array is most likely to be encountered first.

Conclusion

  • Establish a framework for understanding market movements using PD arrays.
  • Prepare for Lesson 6.2 with practical examples of concepts discussed, focusing on the Dollar/Yen pair.
  • Recognize the importance of time and price in trading decisions.

Recommended Approach

  • Prioritize arrays based on the current market's position relative to equilibrium.
  • Be prepared for price movement to not follow a straight path; expect fluctuations.
  • Use the hierarchy to guide trading decisions and expectations.