Discount and Premium in Trading
Overview
- This lecture focuses on understanding discount and premium in trading.
- Prerequisite: Understanding buy side and sell side liquidity.
- Video link provided for a prerequisite lecture.
Key Concepts
Identifying Ranges
- Range Identification: Look for a swing high to a swing low to identify a range.
- Use tools like a Fibonacci (Fib) retracement from the high to the low.
- Equilibrium: The 0.5 Fib level represents the equilibrium.
- Above 0.5 Fib: Premium
- Below 0.5 Fib: Discount
- Multiple ranges exist within price action, e.g., a smaller range within a larger move.
Importance of Discount and Premium
- Risk to Reward Ratio:
- Long positions entered at equilibrium have a risk to reward ratio of 1.
- Deeper into discount increases the risk to reward ratio.
- Conversely, for short positions, deeper into premium increases the risk to reward.
- PD Arrays (Price Delivery Arrays):
- For shorts, look for PD arrays in a premium.
- For longs, look for PD arrays in a discount.
Examples
NASDAQ Daily Chart
- Identify a range from swing low to swing high.
- Track the equilibrium range as price moves.
- Look for discount PD arrays if seeking long positions.
- Example: A fair value gap at a discount used for a long trade.
Dollar Index (DXY)
- Mark range from recent high to low for equilibrium.
- Identify PD arrays in discount for potential long positions.
- Example: Fair value gap identified and price reaches it.
- Forming new ranges and identifying new opportunities as price moves.
GBP/USD Daily Chart
- Observe fill of a daily fair value gap followed by a new high.
- Mark range for potential retracement into discount.
- Example trade setup:
- Daily Chart: Identify PD arrays for long trades.
- 15-minute Chart: Use OTE (Optimal Trade Entry) for improved risk to reward.
- Target fair value gap with better risk to reward than equilibrium.
Conclusion
- Understanding discount and premium helps in framing trade setups with favorable risk to reward ratios.
- Practical examples using NASDAQ, DXY, and GBP/USD illustrate application.
Call to Action
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This lecture provides essential insights into leveraging market ranges for optimized trading strategies focusing on risk management.