Overview
This lecture introduces the concepts of equilibrium versus discount in trading, focusing on identifying optimal trade entry points using price action and Fibonacci levels.
Understanding Equilibrium & Discount
- Equilibrium is the midpoint (50%) of a price swing, typically measured with Fibonacci from the swing low to high.
- When price is at equilibrium, the market is at fair value—neither premium nor discount.
- Price below equilibrium (below 50% retracement) is considered at a discount, offering higher probability for bullish trades.
- Institutions/banks buy at discount, not at premium or fair value.
- Optimal Trade Entry zones are between 62% and 79% Fibonacci retracement levels in a bullish context.
Identifying Impulsive Price Swings
- An impulsive price swing is a strong move from a market low to a high, indicating institutional activity.
- Use daily charts to identify major swing highs and lows for context.
- A swing high forms after at least three candles: a high with both a lower candle to the left and right.
Trade Setup Framework
- Wait for an impulsive price swing (low to high).
- After a swing high forms (three candles), wait for the fourth candle to move lower.
- Only consider buying opportunities when price retraces to equilibrium or, ideally, below it (discount/optimal entry).
- Fast, dynamic rallies are expected from discount levels if the market context is bullish.
Institutional Order Flow & Liquidity
- Institutions accumulate positions at lows and sell to buy stops above old highs.
- Markets often sweep stops under old lows before bullish rallies (known as turtle soup/false breakout).
- Mark out old highs and lows; powerful moves often target these liquidity zones.
Practical Applications
- Use only price charts (open, high, low, close) for analysis—no need for extraneous indicators.
- Apply this framework on demo accounts, starting with daily charts before moving to lower timeframes.
- Losing trades will occur when stops are run below reference lows; anticipate reversals after such sweeps.
Key Terms & Definitions
- Equilibrium — The 50% retracement/midpoint of a price swing, representing fair market value.
- Discount — Price below equilibrium (below 50% retracement), considered attractive for buying in a bullish market.
- Impulsive Price Swing — A sharp, strong price move, usually driven by institutional order flow.
- Optimal Trade Entry — The price zone between 62% and 79% Fibonacci retracement after a bullish impulse.
- Turtle Soup — A reversal pattern after price sweeps below a previous low (stop raid) and rapidly reverses.
- Order Block — A price area where institutions accumulated significant positions.
Action Items / Next Steps
- Practice marking impulsive price swings and equilibrium/discount zones on your daily charts.
- Review old highs and lows to anticipate likely stop/target areas.
- Keep notes on unfamiliar terms and review them as the mentorship progresses.
- Prepare for next week’s lesson on equilibrium versus premium conditions.