Understanding Discount and Premium in Trading

Jul 31, 2024

Notes on Discount and Premium Range in Smart Money Trading

Introduction

  • Topic: Discount and premium range theory in smart money trading.
  • Objective: Understand the psychology behind this concept and its application in trading decisions.

Market Behavior Basics

  • Market moves in impulsive and corrective waves.
  • Bullish Sentiment: Traders buy, causing upward impulsive moves.
    • As prices rise, some traders take profits or short, causing pullbacks.
  • Bearish Sentiment: Traders sell, causing downward impulsive moves.
    • As prices fall, some traders buy back, leading to potential reversals.

Identifying Impulsive vs. Corrective Moves

  • Impulsive Waves:
    • Characterized by same colored candles with large bodies.
  • Corrections:
    • Indecision marked by mixed color candles with small bodies and sideways wicks.

Trading Strategies in Different Market Conditions

In an Uptrend

  • Objective: Buy low, sell high.
  • Wait for a correction to enter at better prices.
  • Identify the latest impulsive move to understand correction range.
  • Key Levels:
    • Break below certain levels indicates loss of buyer control and potential reversal.

Entering the Market

  • Avoid entering too early (risk deeper pullbacks) or too late (miss trades).
  • Use Fibonacci Retracement from start to end of the impulsive wave to identify correction ranges.
  • Fibonacci Levels:
    • 50% Level: Equilibrium level.
    • Above 50%: Premium side.
    • Below 50%: Discount zone.

Reasons for Entering in the Discount Zone

  1. Safer Entry:
    • Market takes out early buyers to create liquidity.
  2. Higher Risk to Reward Ratio:
    • Targeting recent market structure levels enhances risk-reward dynamics.
  3. Safer Stop Loss Levels:
    • Place stop loss below recent swing low.

In a Downtrend

  • Objective: Sell high, buy low.
  • Wait for a correction to better pricing.
  • Use Fibonacci to define premium and discount zones.
  • Sell in Premium Zone:
    • Higher chance for price to fall after corrections within premium ranges.

Higher Time Frames vs. Lower Time Frames

  • Impulsive waves can occur on larger scales.
  • Observing Previous Market Behavior:
    • Small pullbacks indicate strong trends; larger pullbacks in weaker trends.
  • Optimal Trading Zones:
    • Identify fair value gaps and their support roles during corrections.

Risk Management

  • Not every trade will win; maintain a solid risk management plan.
  • Even a 30% win rate can be profitable with good risk management.
  • Importance of backtesting trading plans for confidence.

Practical Example: Pound Dollar 4H Chart

  • Identify downtrend and apply Fibonacci for premium/discount zones.
  • Look for fair value gaps to confirm resistance levels.
  • Observe price action signals on lower time frames for entry confirmation.
  • Use trailing stop loss technique to safeguard profits as market structure shifts occur.

Conclusion

  • Combining market direction, fair value gaps, and premium/discount zones leads to high-quality trade entries.
  • Call to action: Like the video, subscribe for more content, and leave comments on desired topics.