Premium and discount describe where price is inside a dealing range. Take a clear swing low and swing high, split the distance in half, and you have two halves. The upper half is premium: price is relatively expensive. The lower half is discount: price is relatively cheap. The line in the middle is equilibrium, often shortened to EQ.
Larger participants prefer to buy below fair value and sell above it. You do not need to know who is trading to use that. You only need a ruler that tells you whether an idea is early in a move or late in it.
What premium and discount mean
Premium and discount are about location, not direction. Price in premium does not have to fall, and in a strong uptrend gold can stay there for days. What the halves tell you is the quality of a new entry.
- Discount (below 50%): the better half for new buys. The stop can sit close, beyond the range low, while the range high is still far away.
- Premium (above 50%): the better half for new sells, for the same reason in reverse.
- Equilibrium (50%): a neutral line and a poor place to start a new idea.
How to draw the dealing range on gold
The dealing range is drawn from the wick of the swing low to the wick of the swing high, on the candles where those swings actually formed. Bodies leave out part of the move and shift your 50% line. On gold, where a single H4 wick can be 50 to 100 pips long, that difference matters.
In the chart, the higher low prints its wick at 4,012.40 and the higher high prints its wick at 4,068.40. The range is $56.00, which is 560 pips, because on gold $1 equals 10 pips. Half of 560 is 280 pips, so equilibrium is 4,012.40 plus $28.00, which gives 4,040.40.
A Fibonacci tool with a 0.5 level makes this quick, but the maths is just high plus low, divided by two.
Which swing high and swing low to use
The most common mistake is picking the wrong range. We use these rules:
- Use external swings. Anchor on clear swing points, not small internal wiggles inside a pullback.
- Use the leg that broke structure. After a CHoCH, the range runs from the extreme of the move (the low that was swept, for a bullish case) to the high made by the leg that broke structure. That is the leg whose order block we trade.
- Read it on H4. We read structure and draw the range on H4. The daily range gives context: an H4 buy is cleaner when the daily chart is also in discount.
- Redraw when structure changes. When a new high forms and holds, update the range to it.
If you are unsure how to tell an external break from an internal one, read CHoCH vs BOS first.
Premium, discount and the order block: a bullish example
On their own, premium and discount only tell you that price is cheap or expensive. The entry zone is still the order block of the CHoCH leg, and for a buy it should sit in discount.
Walk through the sequence in the chart:
- Liquidity is taken. Gold is making lower highs and lower lows. A candle trades through the sell stops under 4,031.50, down to 4,024.60, and becomes the LL. See liquidity sweeps.
- Structure breaks. Three bullish candles follow. The third one closes its body at 4,061.50, above the LH at 4,056.80. That close is the break of market structure (BMS), 47 pips beyond the swing. A wick through the level would not count.
- The order block is marked. The last bearish candle before that CHoCH leg is the order block, wick to wick: 4,024.60 to 4,035.00, a 104-pip zone.
- The range is drawn. From the LL wick at 4,024.60 to the new HH wick at 4,068.40 is 438 pips. EQ is 4,046.50. The whole order block sits below EQ, in discount.
- The imbalance is noted. The leg left a fair value gap, drawn wick to wick from the high of its first candle (4,041.50) to the low of its third (4,050.50).
Price then pulls back. It passes EQ, fills the FVG and dips into the order block, with a low of 4,033.20 that becomes the HL. Reaching the zone is still not an entry on its own. Inside the H4 order block we wait for M15 to give its own CHoCH, a body close above its last external lower high, followed by a retest.
The bearish version
For sells, everything mirrors. You want the order block of the bearish CHoCH leg to sit in premium.
Here gold is making higher highs and higher lows. Buy stops rest above the high at 4,137.40. A candle runs to 4,144.80, sweeps them and becomes the HH. Then the market turns: a candle body closes at 4,112.50, 101 pips below the HL at 4,122.60. That is the BMS. The last bullish candle before the drop, 4,135.50 to 4,144.80, is the bearish order block.
The range now runs from the HH wick at 4,144.80 down to the LL wick at 4,092.80, which is 520 pips. EQ is 4,118.80, so the order block is in premium. The pullback rallies through the small FVG (4,124.00 to 4,127.00) and reaches the zone at 4,137.20, which becomes the LH. Again, the entry waits for an M15 CHoCH in the opposite direction and a retest.
When the first pullback stays in premium
Often the first dip after a BMS is shallow, and that is where many traders buy too early.
In this example the range is 4,070.60 to 4,112.60, or 420 pips, and EQ is 4,091.60. The first pullback stops at 4,095.20. That is 36 pips above EQ, still in premium. A buy there would be a buy at a relatively expensive price, with the order block of the CHoCH leg still far below.
The rule keeps you out. Price bounces, fails to make a new high and then makes a second, deeper pullback. This one reaches the order block at 4,070.60 to 4,080.00 and forms the HL at 4,077.80. That is where the setup becomes worth watching on M15. Sometimes price never comes back at all; missing that move is the cost of the rule.
Why location changes the risk
The clearest reason to respect premium and discount is the geometry of the trade. Use the bullish example and assume the stop goes 20 pips below the order block, at 4,022.60.
- Entry from the order block, in discount, at 4,035.00: the stop is 124 pips away and the range high at 4,068.40 is 334 pips away.
- Entry in premium, at 4,060.00: the same stop is 374 pips away and the range high is only 84 pips away.
Same chart, same idea, same invalidation. Buying in premium means a stop three times larger and a much shorter distance to the obvious target. Whatever the distance, the position size should be set from that distance and a fixed risk, never the other way round. The lot size calculator does that step for you.
Common mistakes
- Drawing the range on bodies. Use wicks, from the candle where each swing formed.
- Using an internal range. A tiny range inside a pullback gives a meaningless 50% line.
- Treating discount as a buy reason. Discount is a location. You still need the BMS, the order block of the CHoCH leg and an M15 confirmation.
- Ignoring the higher timeframe. An H4 discount buy inside a daily premium is a weaker idea. The weekly bias checklist uses the same split on the weekly range.
Premium and discount checklist
- Is the range anchored on external swings, wick to wick?
- Did a candle body close beyond the swing (BMS), and is the range drawn on that leg?
- For a buy, is the order block of the CHoCH leg below EQ? For a sell, above it?
- Does the daily range agree, or at least not argue against it?
- Did M15 give a CHoCH inside the zone, followed by a retest?
- Is the stop beyond the zone and the position sized from fixed risk?
If any answer is no, there is no trade. Premium and discount will not find setups for you, but they will keep you out of the late ones.