ICT’s Premium and Discount (P/D) model is a foundational concept we can utilize when tape reading to identify the overarching narrative and locate areas of interest where we can look to frame potential trade ideas. Because the P/D concept is fractal, we can leverage multiple time frames to refine our entries and get on side with the higher timeframe order flow. This not only improves our risk to reward ratio, but hopefully minimizes drawdown, and increases the likelihood of the trade playing out.
Also known as a Dealing Range, is a framework for understanding where price is currently being offered relative positioned within a defined range.
- P = Premium: Price is considered expensive relative to the range.
- D = Discount: Price is considered cheap relative to the range.
- A = Array: A list of price elements within the range such as Order Blocks, Fair Value Gaps, and other points of interest(POI).
The basics of Premium/Discount (P/D) are really pretty simple, but as we dig into the topic, . The following is my attempt to exp
Identifying Premium/Discount(P/D) zones andstudying their fractal nature helps us determine where price is relative to fair value of the current dealing range. By understanding the higher timeframe order flow, and where price is within the current dealing range, we can wait for time and price to align
While powerful on it’s own, it should still be paired with market structure, Power of 3, daily/weekly profiles, and other ICT trading concepts to understand the narrative a
Observing how price reacts to PDAs within each zone is crucial to help frame and understand the current narrative and identify opportunities to take a position and get on side with order flow.
Note: Dealing Ranges are fractal, meaning there are ranges within ranges. These lower timeframe (LTF) ranges nested within higher timeframe (HTF) ranges are crucial to study. On it’s own it’s useless, but when combined with proper time frame alignment, market structure, daily and weekly profiles, it can give us a framework to identify high probability trades.
How ICT’s Premium/Discount Zones Work
ICT’s Premium-Discount model can act as a type of barometer to gauge market sentiment and identify fair value before engaging the market. By studying how price reacts to PDA’s within these ranges, and how price reacts to PDA’s within the context of these ranges, can offer clues that can help us find favorable trade opportunities to get on side with order flow., based on whether price is positioned in premium (expensive) or discount (cheap) zones relative to the range.
- Premium Zone: The upper half of the range, where price is more expensive. Typically, we want to look for selling opportunities in a premium.
- Discount Zone: The lower half of the range, where price is cheaper. Typically we want to look for buying opportunities in a discount.
- Equilibrium (50%): The midpoint of the range (50%), considered fair value.
It’s essential to study how price behaves around equilibrium. For example, as price approaches equilibrium, observe what price is doing? Is it stalling due to approaching the end of a session, possibility generating liquidity? Is it at a key time (end of day session, end of the week, end or start of a month, day before news, etc). There specific signatures in price that give us clues towards the next most likely direction, such as whether price is respecting or disrespecting PDAs, that can affect whether price continues, consolidates, expanding, or reverses. As always we need to take into consideration other factors such as the economic calendar.
Note: Price is not always required to reach a full premium or discount zone. Sometimes, price only barely reaches into equilibrium before reversing.
Note: Dealing Ranges are fractal in nature. A higher timeframe dealing range generally contains lower-timeframe ranges that can be leveraged opportunities for refined entries or trade ideas.
How to Properly Draw Dealing Ranges
There is a bit of subjectivity to marking out dealing ranges, as everyone views the market through a different lens depending on how they trade. It will take considerable time and practice to figure out how to utilize it exactly in your own trading. I can only show you how I learned to draw them and find they work best for me. Spend a good amount of time observing how price behaves or reacts within the ranges you draw, according to your approach to the markets.
To mark out Premium & Discount Zones follow these steps:
- Identify the price leg by marking a swing high to swing low (or swing low to swing high). I personally use the Gann Box Tool in TradingView as my preferred drawing tool.
- Focus on price legs that have taken liquidity (e.g., swept previous highs or lows) and established new price levels.
- Draw a Fibonacci retracement from the swing high to the swing low to establish the 50% equilibrium line, dividing the range into premium and discount zones.
“A new dealing range always starts with an Order Block…obviously a rejection block and old high/low is attached to it…”
From The OTE Trader’s back testing session video titled “TIMEFRAME ALIGNMENT: How to Trade the CORRECT ORDERFLOW“
Important Notes & Tips [need better subheading here]
- PDA’s can overlap, meaning there are typically multiple ranges within ranges, which can get kind of confusing.
- Price doesn’t need to go to premium or discount, it can simply reach into equilibrium (50%) of the range before reversing.
- When bearish we want to see bearish PDA’s respected and when bullish we want to see Bullish PDA’s respected
- When PDA’s are disrespected it is a sign of one of the following:
- Order flow is changing
- Price is consolidating
- Our read on price is simply wrong
- When PDA’s are disrespected it is a sign of one of the following:
- Keep things simple: Highlighting every PDA on your charts will just clutter your charts with lines and boxes that will confuse and overwhelm you, making it harder to read price. Keep your charts clean and simple, marking out only what is important right now (or at least have one chart that way).
- When price disrespects a PDA, it inverses it, flipping it’s supportive/resistive nature. Support becomes resistance, and resistance becomes support.
Elements of ICT’s Premium-Discount Array Matrix
After drawing out our dealing range, we can start identifying which of the following PDA’s exist within the range. Pay attention to which elements have been mitigated (price returned back to them already), and which are still unmitigated.
- Old High/Low: Previous significant swing high or low.
- Rejection Block:
- Order Block
- Fair Value Gap
- Liquidity Void
- Breaker Block
- Mitigation Block
How can we utilize Premium/Discount?
Determine Daily Bias
Identify where we are in order flow
PDA’s help us identify where we are at within the current dealing range.
If we’re bearish, we want to be looking to frame sells in a premium, anticipating bearish PDA’s to act as resistance to push price lower.
If we’re bullish we want to be looking to buy in a discount, anticipating bullish PDA’s to act as support to trade higher.
Why wait to sell in a premium and buy in a discount? Because it allows us to get a more favorable risk to reward ratio, which supports the idea that risk management or capital preservation is the most important thing we can focus on in trading.
Identify the current draw on liquidity
Based on ICT’s theory of the Interbank Price Delivery Algorithm (IPDA), price does primarily two things:
- Rebalances Inefficiencies (Imbalances)
- Seeks old highs/lows (Liquidity)
Price likes to mitigate unmitigated PDA’s, so one of the ways we can obtain a bias and current draw on liquidity is by locating unmitigated PDA’s within a dealing range. Price tends to like to ebb and flow between liquidity pools.
Why use Discount & Premium?
The main reason to utilize Premium & Discount Zones is to optimize your risk-to-reward ratio. Entering trades deeper into premium or discount zones offers better risk-reward opportunities as price moves away from equilibrium (50%), increasing potential reward.
For example, if you have bullish market structure and are attempting to frame a trade at equilibrium of the range with a stop at the lows then your risk to reward is 1:1. However, if you can identify a PDA deeper in discount, say near OTE of the range, your risk to reward will increase as well as likely spend less time in drawdown, which is important for psychological reasons.
Common Pitfalls and Best Practices
Ignoring the Higher Time Frame
Always align your trade with the higher timeframe (HTF) order flow to avoid tunnel vision on the LTF.
Cluttering the Chart with Too Many PDAs
Avoid marking every PDA—focus on the most relevant ones to prevent over-complicating your analysis and crowding your charts.
Having levels marked on our charts, while helpful, can also interfere with our ability to properly read and interpret the current price action (PA). The more drawings you have on the charts the more likely it is to cloud your judgement and misinterpret PA. you have on your charts the more difficult it can become to determine
Overlapping Too Many Dealing Ranges
Price is fractal, so premium and discount zones can overlap, so focus on on the most relevant dealing ranges to your trade idea. Learning how to align timeframes can help you understand how to better choose dealing ranges. If you’re struggling with dealing ranges, try focusing your attention on the most obvious swing points.