The Tradeskill
Fair Value Gaps & Order BlocksBeginner

Premium, Discount and Equilibrium

How to split a dealing range into premium, discount and equilibrium (50%), why traders buy in discount and sell in premium, and the limits of the idea.

Library categories

What it means

Take a defined range from a swing low to a swing high. The 50% level is equilibrium. Above it is premium (relatively expensive); below it is discount (relatively cheap).

It is a way of locating price within a range, not a valuation.

Why traders use it

Buying in discount and selling in premium improves reward-to-risk toward the opposite end of the range. In a bullish structure, many traders only look for longs below equilibrium.

Chart examples

Premium, discount and equilibrium

Buy in discountPremiumEquilibrium (50%)Discount
The leg from the swing low to the swing high is split at 50%. The pullback into discount is where long setups are considered.Schematic diagrams drawn to explain the idea; they are not market data.

How to identify it objectively

  • 1Choose the range: the most recent confirmed swing low and swing high of the leg you trade.
  • 2Equilibrium = (high + low) / 2.
  • 3Above = premium; below = discount.
  • 4Re-draw when a new swing high or low forms.

Bullish use

  • 1Bullish structure.
  • 2Price pulls back below equilibrium into discount.
  • 3Look for a bullish setup there; target the high.

Bearish use

  • 1Bearish structure.
  • 2Price rallies above equilibrium into premium.
  • 3Look for a bearish setup there; target the low.

What confirms it

  • A setup (sweep, order block, FVG) inside the right half.
  • Structure agrees.

What invalidates it

  • Price breaks the range extreme against your bias.
  • The range was chosen after the fact.

How a hypothetical setup is built

Entry

In discount, on a bullish confirmation close.

Stop

Below the swing low that defines the range.

Target

The swing high (premium end).

A hypothetical illustration of how the concept is turned into a plan, not a recommendation. Practise it on a paper account first.

Related concepts

Historical testing

Not tested on The Tradeskill yet. As a filter, test it by comparing results of the same entry rule taken in premium versus discount.

Limitations: when it fails

  • Ranges are subjective unless swing rules are fixed.
  • Strong trends can stay in premium for a long time.
  • Equilibrium is not a support or resistance level by itself.

Knowledge check

Pick an answer to see the explanation. Nothing is saved.

Equilibrium is…

1. Equilibrium is…

In a bullish structure, where do traders prefer to buy?

2. In a bullish structure, where do traders prefer to buy?

When should the range be re-drawn?

3. When should the range be re-drawn?

Practise it risk-free

Open the free chart, use replay to go back in time and look for this concept candle by candle with $20,000 in virtual money.