Most traders understand the idea of buying low and selling high. But very few understand how to define it properly on a chart.
That’s where the premium and discount trading strategy comes in.
This approach gives you a clear framework for identifying fair value, spotting discounted price, and knowing when price is trading at a premium, instead of guessing or reacting emotionally.
In this guide, I’m going to show you how I use premium and discount zones with optimal trade entry (OTE) to find higher-probability entry points in trending market conditions.
We’ll cover how to draw the zones correctly, how Fibonacci retracement levels fit into the process, how market structure controls direction, and how I use OTE to refine risk and stop loss placement.
If you’ve ever felt like price reverses just before your entry, or runs without you after you hesitate, this framework will help you understand why.
Let’s get to it!
What Is Premium and Discount in Trading?
The idea of premium and discount comes straight from smart money concepts and basic technical analysis.
All we’re doing is defining value inside a dealing range so we know what’s expensive and what’s discounted price.
You start by identifying a clear swing high and swing low on your chart.
Once you apply the Fibonacci retracement tool between those two points, everything above the 50% level is considered the premium zone, and everything below it is considered the discount zone.
Why does this matter? Because in bullish market trends, I want to focus on buying discounted price in the discount area. Conversely, in bearish market conditions, I want to sell when price trades back into the premium zone. That’s the foundation of risk and position control.
How to Draw Premium and Discount Zones Correctly
This is where a lot of traders get tripped up. Premium and discount zones must be drawn from external swing highs and swing lows, not from internal price swings.
Internal structure doesn’t define fair value. The external high and low define the range that matters, and that is what you should always anchor your Fibonacci retracement levels to when doing your chart work.
Once that range is defined, the 50% level becomes equilibrium. Above it, price is trading at a premium. Below it, price is trading at a discount.
What Is Optimal Trade Entry (OTE)?
Knowing where premium and discount zones sit is still not enough on its own. You also need a precise entry point.
That’s where optimal trade entry, or OTE, comes in. OTE is a refined zone inside premium or discount where price most often reacts during a market trend.
The OTE zone is built using Fibonacci retracement levels. The retracement levels I focus on are the 62%, 70.5%, and 79% levels on the fib retracement.
That 62% to 79% range narrows a wide premium discount area into a very specific zone where risk can be defined and stop loss placement becomes much cleaner.
How Premium and Discount Works With OTE
Premium and discount give you context. OTE gives you precision.
In an uptrend, price should retrace back into discount zones. I am not interested in buying anywhere in discount. I want price to retrace into the OTE inside that discount zone before I consider entering long positions.
In a downtrend, the logic flips. Price should retrace higher into the premium zone, and I only focus on short positions once price reaches the OTE inside that premium area.
I am not guessing at reversals or trying to trade against resistance levels blindly. I wait for price to rebalance inside of the OTE before hunting for an entry.
Using Market Structure With Premium and Discount
Premium and discount zones don’t tell you direction by themselves. Market structure does.
Once I see a clear change of character and a break in structure, I know which side of the market has control. From there, premium and discount simply help me identify where I want to execute.
Structure defines bias. Premium, discount, and OTE define the entry zone.
What to Look for When Price Hits OTE
Price reaching OTE is the first step, not the entry itself.
Once price reaches the optimal trade entry, I drop to a lower timeframe on TradingView and watch how structure develops. For tips on the best time to analyze your charts, consider establishing a weekly routine.
Markets are fractal, so a pullback on a higher timeframe often looks like a counter-trend move on a lower timeframe.
When that lower time frame, such as a 5-minute chart, confirms a change of character in the direction of the 1-hour time frame, that’s my cue to enter.
In this case, my stop loss goes above the last 5-minute swing high. My targets, as explained in the video above, include recent lows and equal lows, giving me a 3:1 reward-to-risk ratio.
When OTE Fails (And What It Tells You)
In a healthy trend, price should respect the OTE zone. When it doesn’t, that information is valuable.
If price starts closing through OTE and accepting beyond it, that often signals a shift in market structure or liquidity.
I’ve seen this act as an early warning of a reverse move hours, and sometimes even a full session, before a major change of character shows up.
Failed OTE reactions are not useless. They often point to changing market conditions.
What If Price Never Reaches OTE?
This comes up all the time. Sometimes price never retraces back into the OTE zone at all.
That’s part of trading strategies built around patience. Missing trades is normal.
The mistake traders make is deleting those zones from their chart. Untouched OTE zones, fair value gaps, or imbalance areas often become future targets when price later reverses.
Common Premium and Discount Trading Mistakes
One of the most common mistakes traders make is trading against the trend. Buying in premium or selling in discount usually leads to poor risk-to-reward.
Another issue is drawing zones from internal swings, which completely distorts fair value. OTE is also a zone, not a single point, treating it like an exact price often leads to early entries.
Finally, entering without confirmation, without structure, or without a clear stop loss is where most losses come from.
The Big Picture
The premium and discount trading strategy is not complicated, but it is structured.
You define fair value. You wait for price to retrace into value. You refine entries using OTE and Fibonacci retracement. And you confirm direction with market structure.
If you stay patient and align yourself with the market trend, this framework gives you a repeatable way to trade price instead of reacting emotionally.
Once you start seeing how price moves between premium and discount, many other patterns and indicators begin to make more sense.
If you found this helpful, this site is focused on education and practical trading knowledge. Until next time, trade well.
Frequently Asked Questions
Does premium and discount work in ranging markets?
It works best in trending market conditions. In ranges, value constantly shifts and premium discount zones lose reliability.
What timeframe works best for premium and discount?
This approach works across all timeframes, but higher timeframes tend to give cleaner structure and more reliable entry points.
Is OTE required to trade premium and discount?
No, but it significantly improves precision, risk control, and consistency.
Does this strategy only work in forex?
No. Premium and discount concepts apply to any liquid asset, including indices, futures, and other securities.
