A premium zone is a way of describing where price sits inside a recent trading range: it’s the upper half of that range where the asset is relatively expensive compared with the range’s midpoint or “fair value.” Traders who use institutional or price-action frameworks — often called Smart Money Concepts (SMC) or Inner Circle Trader (ICT) techniques — treat the premium zone as the area to prefer selling or taking profits on long positions, because institutions and large players often look to re-enter shorts or scale out of buys from higher prices.
Trading carries risk. This article explains the premium zone concept and how traders commonly identify and use it, but it is not individualized advice.
The idea behind premium and fair value
Markets move between layers of demand and supply, and over short windows they form a high, a low and a midpoint. That midpoint is the equilibrium or fair value for the chosen swing. Anything trading above that midpoint is considered “premium” relative to that range; anything below is “discount.” The labels are relative, not absolute — a premium zone on a four‑hour swing can still be a discount on a daily swing if you change the reference points.
Think about a simple example: if EUR/USD made a swing low at 1.1000 and a swing high at 1.1200, the midpoint is 1.1100. Price above 1.1100 sits in the premium area for that range. Traders using this framework are effectively asking: “Is price expensive or cheap relative to the last meaningful move?” and then aligning entries with the larger trend and liquidity dynamics.
How traders mark a premium zone (step by step)
Traders most commonly use a Fibonacci retracement configured to show only the 0 (end), 0.5 (midpoint), and 1 (start) levels. First you identify the swing that matters: in a downtrend you anchor the tool from the recent swing high down to the swing low; in an uptrend you anchor it from low to high. The 50% line becomes the equilibrium. Everything above that line is the premium zone for the swing you chose.
It’s important to use external swings — the broad, well-defined high and low — rather than small internal swings. External swings better capture where larger liquidity and institutional interest sit. After you draw the midpoint, you don’t trade the midpoint itself; you use the premium area as context and then wait for additional structure or price-action confirmation before considering a short.
How the premium zone is used in practice
Using the premium zone is not a standalone entry trigger. Traders pair it with market structure, order blocks, fair value gaps (FVG), liquidity grabs, and lower‑timeframe confirmations. In a clear downtrend, the premium zone is where you expect retracements to stall and resume downward. For example, price may retrace into the premium zone, reach an order block created by prior institutional selling, form a bearish engulfing or a rejection wick, and then break structure to the downside. That sequence gives a higher-probability short setup than simply selling anywhere above the midpoint.
Conversely, when the market has shifted from bullish to bearish (a change of character or market structure shift), new premium zones are drawn from the latest swing high to the new swing low. That allows traders to look for short opportunities from a fresh “expensive” region that institutions might use to re-enter selling.
Concrete example with numbers
Suppose GBP/USD on the 4‑hour chart had a swing low at 1.2500 and a swing high at 1.2900. The midpoint is 1.2700. Price rallies from 1.2500 up to 1.2850, then pulls back into the 1.2750–1.2850 area. Since that pullback sits above 1.2700 it is inside the premium zone of the 1.2500–1.2900 range. A trader who reads the higher‑time‑frame structure as bearish might look for a bearish price signal here: a failed attempt to break above a prior minor high, a visible order block at 1.2830, or a fair value gap that aligns with the 4‑hour premium area. If those elements align and the lower timeframe shows a rejection pattern, the trader could plan an entry with a stop above the swing high and targets set toward the range low. This example shows how the premium label simply frames where to prefer short ideas; the entry itself comes from confirmations and risk management.
Timeframes and multi‑timeframe context
Premium and discount zones work on any timeframe, but their reliability grows with the timeframe and the clarity of structure. A premium zone drawn on the daily chart will usually carry more significance than one on a 5‑minute chart because higher‑timeframe levels reflect larger pools of liquidity and slower‑moving institutional flows. Good practice is to establish directional bias from a higher timeframe (daily or 4‑hour) and then hunt for entries on a lower timeframe where structure and confirmation are visible. Remember markets are fractal: what looks like a retrace on the daily may be an impulsive move on the 1‑hour, so align multiple timeframes before acting.
Common confirmations traders add
Traders commonly look for one or more confirmations before taking action inside the premium zone. Typical confirmations include a breaker or order block touch, a fair value gap that price is retesting, a liquidity sweep (stop hunt) followed by rejection, or a read of market structure showing a break of structure (BOS) in the direction of the intended trade. Lower‑timeframe evidence — such as a clear change of character, a failed attempt to make a new high, or a strong bearish candle on a retest — strengthens the case that the premium zone is doing its job as a supply area.
Practical trade planning and risk control (general guidance)
A practical plan starts with defining the swing and marking the premium zone, then using higher‑timeframe structure to decide whether you should be looking to sell or avoid selling that zone. If you choose to take a short, you define a clear stop level (for example, above the recent swing high or above the order block), size the position so the risked amount fits your risk rules, and set realistic targets such as the range midpoint, the swing low, or measured moves. Avoid treating the premium zone as a precise entry point; it is a zone that improves the odds when combined with confirmations.
Risks and caveats
Premium/discount concepts provide useful context but are not guarantees. Price can remain “expensive” for long periods during strong trends and may never return to the midpoint before continuing. Misidentifying the swing, using internal rather than external reference points, or ignoring higher‑timeframe structure are common mistakes that lead to poor outcomes. The premium zone should not be traded in isolation — it works best as part of a structured approach that includes confirmation, sensible stop placement, and strict risk management. Markets can behave unpredictably around major news, low liquidity, or during large institutional flows; always be aware of these conditions. Trading involves real capital risk and is not appropriate for everyone; this article is educational and not personalized financial advice.
Key Takeaways
- Premium zone = the upper half of a chosen swing (above the 50% midpoint), used as a contextual area where price is relatively expensive and short ideas are preferred when structure aligns.
- Mark the zone from external swing high/low using a simplified Fibonacci (0–0.5–1), use higher‑timeframe bias, then seek lower‑timeframe confirmation before entering.
- The premium label is context, not a standalone signal; combine it with order blocks, fair value gaps, liquidity structure and clear stops.
- Trading carries risk; always use position sizing and stop‑loss discipline. This is educational material, not personalized advice.
References
- https://www.writofinance.com/premium-and-discount-zone/
- https://www.equiti.com/sc-en/news/trading-ideas/discount-premium-zones-in-ict-trading/
- https://www.fluxcharts.com/articles/Trading-Concepts/Price-Action/premium-discount-zones
- https://dailypriceaction.com/blog/premium-and-discount-trading-strategy/
- https://www.forexfactory.com/thread/1343240-premium-and-discount-zones-in-ict-pd-array
- https://innercircletrader.net/tutorials/ict-premium-and-discount-zone-identification/