Overview
This lecture covers the concept of equilibrium as a retracement tool in trading, explaining how to identify premium and discount zones, apply equilibrium across timeframes, and combine it with other strategies for optimal entries.
What is Equilibrium?
- Equilibrium is a retracement tool used to identify premium (above 50%) and discount (below 50%) zones in the market.
- Measure equilibrium by drawing from the most recent low to high (uptrend) or high to low (downtrend), and marking the 0.5 (50%) level.
- The area above the 0.5 line is considered premium; below it is discount.
How Smart Money Uses Equilibrium
- Smart money buys in the discount zone (below 50%) during uptrends and shorts in the premium zone (above 50%) during downtrends.
- Smart money avoids buying in premium and shorting in discount zones.
Practical Application of Equilibrium
- Apply the tool to all timeframes, from monthly to 15-minute charts.
- After a new high/low forms, drag the tool to re-measure the current range.
- Combine equilibrium with other concepts like fair value gaps, order blocks, and breaks of structure for higher probability entries.
- Wait for price to enter equilibrium and show confirmation (break of structure, filling an imbalance) before entering a trade.
- Target previous areas of liquidity when taking profits.
Charting Tools & Settings
- Use a Gann box or Fibonacci retracement set to display only 0, 0.5, and 1 levels.
- Remove unnecessary Fibonacci levels to simplify the tool for equilibrium use.
Example Trade Process
- Identify market structure break and measure equilibrium range.
- Wait for price to enter equilibrium and align with an order block or fair value gap.
- Wait for confirmation (break of structure) on a lower timeframe.
- Place trade, set stop loss below the relevant low/high, and target previous liquidity.
Key Terms & Definitions
- Equilibrium — The 50% retracement level dividing premium (upper half) and discount (lower half) zones.
- Premium — Price area above the 0.5 level where assets are considered expensive.
- Discount — Price area below the 0.5 level where assets are considered cheap.
- Fair Value Gap (FVG) — An area of imbalance in price that may draw price movement.
- Order Block — A price zone where buy or sell orders accumulate, often leading to reversals.
- Break of Structure (BOS) — A price move that breaks a previous high or low, signaling a trend change.
- Liquidity — Areas where stop losses or pending orders may be clustered, often targeted by price movements.
Action Items / Next Steps
- Practice applying the equilibrium tool on different timeframes and markets.
- Combine equilibrium analysis with other confirmations (order blocks, fair value gaps, BOS).
- Prepare for upcoming lessons on trading plans, psychology, and advanced strategies.