What Are Premium and Discount?
Premium and discount split a price move in half at its midpoint. The upper half is premium, the lower half is discount, and the rule is to buy in the discount half and sell in the premium half rather than at the extremes of a move that has already run.
The simplest idea in smart money concepts, the one that helps a beginner most, and the one almost nobody makes a video about. All three of those are measurable and the last one is at the bottom of this page.
How it works
Take the move you are trading and cut it in half.
The upper half is premium — expensive relative to this move. The lower half is discount — cheap relative to it. The midpoint is sometimes called equilibrium, which is just a name for the halfway line.
That is the entire calculation. Two prices, divided by two.
What it is actually for
Buy in the discount half. Sell in the premium half.
The value is not that it finds entries — it does not. The value is that it rules things out.
It stops you buying something that has already run. That is the most common way a new trader gets a bad fill, and it happens because a move looks most convincing at its most expensive point.
A rule that says “not here” costs nothing and prevents a whole category of trade.
Why the stop gets smaller
This is the practical payoff and it is worth stating in numbers.
If you buy in the discount half, the low of the move — the price at which the whole idea is wrong — is close by. If you buy near the high, that same low is far away.
Same invalidation price, very different distance. Which means, by the arithmetic on the risk management page, a much bigger position for the same money at risk.
It is the 50% Fibonacci line
Worth saying plainly, because the two get taught as separate subjects.
The equilibrium line and the 50% Fibonacci retracement of the same leg are the same line. Drawn with a different tool, from the same two prices, landing in the same place.
Some traders go further and prefer a deeper part of the discount half — the band around 62% to 79% of the retracement, which is where the name optimal trade entry comes from. The reasoning is that a deeper pullback puts the entry closer to the invalidation and makes the stop smaller still.
The honest version: the midpoint is arithmetic, and everything past it is convention. A deeper entry is a better price if it gets there, and a move that turns at 55% leaves you watching. That is the trade-off, and no number resolves it.
If you want the full treatment of where the ratios come from, that is the fibonacci page.
The mirror, for a short
In a downtrend the leg runs the other way, so you want to be selling in the premium half — after a bounce, not after a fall.
Why it lines up with the other tools
Not a coincidence, and it follows from the arithmetic.
An order block that produced an up-move sits at the bottom of that move, because it is the candle just before it started. So it is in the discount half by construction — it cannot be anywhere else.
The same is true of the fair value gap left low in an impulse. Which means the filter and the entry tools agree far more often than they disagree, and when they do disagree it is usually because the leg was measured differently.
A worked example
Pick the leg. The last clear move, low to high.
Halve it. One line on the chart, and now every price on it is either expensive or cheap relative to that move.
Price runs up. Nothing to do. It is in premium and you are not a buyer there.
Price pulls back below the midpoint. Now the condition is met — but this is a filter, not a trigger. Something else has to give you the entry: a level, a pullback holding, an order block.
The stop goes under the low of the leg, because below there the move you measured is undone and the whole frame is gone.
The original data
Across our study of 24,971 trading videos, only 31 cover premium, discount or equilibrium.
Their median is 31,558 views, and 58% never pass 50,000 — a low share by the standards of this glossary, meaning a far higher proportion of them do well than is usual. For comparison, breakouts have 468 videos and a median of 5,358.
Thirty-one is a small sample and this page will not build an argument on it. But the direction is hard to miss: the simplest idea in the framework is the least covered and among the best performing.
When it fails
The answer depends on which leg you measured
This is the real weakness. Measure the last leg and you get one midpoint; measure the whole move and you get another. The same price can be premium on one reading and discount on the other, and neither person is cheating.
The only fix is to decide which leg you are trading before you draw the line, and to notice when you have redrawn it to make a trade acceptable.
Cheap is not safe
A discount price in a market that is going down is just a lower price. The rule tells you where not to buy in a trend; it does not tell you a trend exists. Without market structure it is a discount all the way to the bottom.
You are treating it as a signal
It has no entry in it. Price being in the discount half is a condition that can be true for days.
You found the leg afterwards
Once you know where price went, there is always a leg whose midpoint makes the entry look disciplined.
Related
Smart money concepts is the map — this is one of its five pieces and the page shows how they overlap.
Pullback is usually what carries price into the discount half in the first place.
And risk management is where buying cheap turns into a smaller stop and a larger position for the same risk.
This is the one I would give a beginner first out of everything in smart money concepts, and it is the least discussed. It is not a signal and it does not tell you what to do - it tells you what not to do, which at the start is worth more. Almost every bad fill I took early on was buying something that had already gone up, and the midpoint of the last move would have talked me out of most of them in about two seconds.
— Michael Whitman, from this video
This page is educational, not financial advice. Test every idea on your own charts before risking money.