What are Premium & Discount Zones?
💡 Definition
Premium and Discount Zones divide the price range into areas of relative value. Discount Zones represent areas where price is "cheap" or undervalued (lower 50% of range), while Premium Zones represent areas where price is "expensive" or overvalued (upper 50% of range). Smart Money buys in discount and sells in premium.
In Smart Money Concepts (SMC), understanding premium and discount is fundamental to timing entries and exits. Institutions accumulate positions in discount zones and distribute in premium zones. Trading with this flow dramatically improves win rates and risk-reward ratios.
Visual Representation
Premium & Discount Zones on Price Range
The 50% equilibrium line divides premium (expensive) from discount (cheap) zones
The Three Zones Explained
Premium Zone
Location: Upper 50% of the price range (above equilibrium)
Meaning: Price is relatively expensive or overvalued. Smart Money typically looks to sell or take profits here.
Action: In an uptrend, wait for pullback to discount. In a downtrend, look for short entries in premium.
Equilibrium
Location: The 50% midpoint of the price range
Meaning: Price is at fair value. Market is balanced between buyers and sellers at this level.
Action: Generally avoided for entries. Used to measure whether price is in premium or discount. Acts as magnet for price.
Discount Zone
Location: Lower 50% of the price range (below equilibrium)
Meaning: Price is relatively cheap or undervalued. Smart Money typically looks to buy or accumulate here.
Action: In an uptrend, look for long entries in discount. In a downtrend, wait for rally to premium before shorting.
Fibonacci Integration
Premium & Discount with Fibonacci Levels
The most common Fibonacci retracement levels naturally align with premium and discount zones. The 61.8% and 78.6% levels are in premium, while 38.2% and 23.6% are in discount. The 50% level marks equilibrium.
Trading Based on Trend Direction
Buy vs Sell Strategies
Uptrend Strategy (Bullish Bias)
- Wait for price in discount zone
- Look for bullish Order Blocks
- Enter long positions in discount
- Take profits in premium zone
- Avoid buying in premium
- Best entries: 61.8%-78.6% retracements
Downtrend Strategy (Bearish Bias)
- Wait for price in premium zone
- Look for bearish Order Blocks
- Enter short positions in premium
- Take profits in discount zone
- Avoid selling in discount
- Best entries: 61.8%-78.6% retracements
How to Apply Premium & Discount Zones
Step-by-Step Application
Step 1: Identify the Range
Determine the current swing high and swing low that define your price range. Use higher timeframes (4H, Daily) for more reliable ranges.
Step 2: Mark the 50% Level
Draw a line or use Fibonacci tool to mark the exact midpoint (equilibrium) between the swing high and low.
Step 3: Determine Market Bias
Identify whether the market is in an uptrend, downtrend, or range. This determines whether you look for longs or shorts.
Step 4: Wait for Price to Enter Your Zone
In uptrend, wait for discount. In downtrend, wait for premium. Don't force trades when price is at equilibrium.
Step 5: Combine with Other SMC Concepts
Look for Order Blocks, FVGs, liquidity grabs, or BOS within your premium/discount zone for optimal entry timing.
Step 6: Execute with Proper Risk Management
Enter when confluence aligns, place stops beyond the zone, and target the opposite zone (discount to premium or vice versa).
Key Trading Rules
- Buy Low, Sell High: Always aim to buy in discount and sell in premium - this is the foundation of profitable trading
- Avoid Chasing: Never buy in premium during uptrends or sell in discount during downtrends
- Patience is Key: Wait for price to return to your zone - don't force trades at equilibrium
- Higher Timeframes Matter: Daily and weekly premium/discount zones are more significant than intraday
- Dynamic Ranges: Update your ranges as new swing highs and lows form
- Combine with Structure: Premium/discount alone isn't enough - use with BOS, CHoCH, Order Blocks
- Consider Multiple Ranges: Analyze premium/discount on multiple timeframes for better context
- Risk-Reward Improves: Buying discount and selling premium naturally creates favorable risk-reward setups
Why Premium & Discount Zones Work
Premium and discount zones work because they reflect the fundamental principle of value in markets. Smart Money institutions understand that all markets oscillate between states of overvaluation and undervaluation. By identifying these zones, they:
✦ Accumulate positions when price is cheap (discount) with minimal resistance
✦ Distribute positions when price is expensive (premium) to willing buyers
✦ Create mean reversion opportunities as price naturally seeks equilibrium
✦ Engineer liquidity grabs at extremes before reversing to fair value
✦ Maximize profit potential by buying low and selling high systematically
Retail traders often do the opposite - buying premium (FOMO at tops) and selling discount (panic at bottoms). Understanding premium and discount helps you trade like institutions instead of being their counter-party.
Common Scenarios
- Premium Rejection: Price enters premium in uptrend but can't hold — signals potential reversal or deeper pullback.
- Discount Accumulation: Price consolidates in discount before explosive move up — institutions accumulating.
- Equilibrium Breakthrough: Strong break through 50% often leads to opposite zone quickly.
- Premium Sweep → Discount Rally: Liquidity taken above range high, then swift move back through equilibrium into discount and rally.
- Discount Sweep → Premium Sell: Liquidity taken below range low, rebound through 50% into premium where shorts set up.
- Multi‑TF Alignment: HTF discount with LTF bullish OB offers tight‑risk longs; inverse for shorts.
Important Notes & Risk
Context Beats Lines
Premium/discount is a framework, not a signal. Treat the 50% line and fibs as context for liquidity and value, then wait for structure and execution signals (BOS/CHoCH, OBs, FVGs, sweeps) to enter.
Risk a small, consistent fraction per idea (e.g., 0.25%–1%). Place stops beyond the relevant zone extremity or structure pivot and avoid trading major news spikes that can temporarily distort premium/discount behavior.