Premium and Discount Zones and OTE in SMC: The 62% to 79% Fibonacci Retracement

Lesson 6 of 10 · Intermediate

The dealing range and equilibrium

Before we say price is "expensive" or "cheap", we have to say relative to what. In SMC the reference is the dealing range: the span between a valid swing low and a valid swing high. The most common choice is a move that began with a sweep and ended with a BOS. For example, if gold made a low at 4,000, then rose to 4,060 and broke structure, the current dealing range is 4,000 to 4,060.

The midpoint of this range is called equilibrium (EQ). In our example, equilibrium is 4,030. It is the same as the 50 percent Fibonacci level and, in this style, it marks the boundary between the two halves of the range.

Choosing the start and end points of the range is the most important and most subjective part of this concept. Two traders can pick two different dealing ranges on the same chart and reach two different conclusions. To reduce the ambiguity, write down the selection rule, for example: "from the latest swept swing low to the latest high that produced a BOS, on H1".

Premium and discount

The upper half of the dealing range is called premium and the lower half discount. The logic is simple and largely intuitive: when the bias is bullish, buying in the cheap half of the range is a better trade, because the distance to a logical stop is shorter and the distance to the target is longer. When the bias is bearish, selling in the expensive half has the same advantage.

In practice this rule is a filter: it keeps you from buying in premium and selling in discount. Many emotional entries are exactly this mistake: buying after a long rally, in the highest part of the range. Being a filter also means the rule is not an entry point by itself; the discount half may be tens of dollars wide.

The concept applies on several layers at once. Price may be in discount of the H4 dealing range and in premium of the M15 dealing range. Traders usually prefer entries that are in discount of the higher timeframe and in discount of a smaller range as well.

OTE: the optimal trade entry zone

OTE stands for Optimal Trade Entry and in ICT material refers to the zone between the 62 and 79 percent Fibonacci retracement levels; the 70.5 percent level is often watched as its midpoint. For a bullish setup, you draw the Fibonacci from the low to the high of the move and mark the 62 to 79 percent retracement zone. For a bearish setup, you draw it from the high to the low.

The idea behind OTE is that entering on a deep pullback, if structure holds, gives a better risk-to-reward ratio. To be fair, there is no mathematical or physical reason why the market should respect exactly 62 or 79 percent; these numbers are zones of attention, not magic levels. OTE is worth more when it overlaps with another factor, for example an OB or FVG lying within the same zone.

A hypothetical calculation on gold

Suppose the bullish XAUUSD dealing range runs from 4,000 to 4,060, a range of 60 dollars. Retracement levels measured down from the high are calculated like this:

So the OTE zone is roughly between 4,012.6 and 4,022.8, entirely inside discount. Now if there is a bullish OB on M15 between 4,015 and 4,019, an interesting overlap exists. A logical invalidation point for this idea is a break of the 4,000 low, which was the origin of the whole move; some traders place a closer stop with lower-timeframe confirmation. These numbers are only to teach the method of calculation.

Note that choosing wicks or bodies for the start and end points shifts the levels by a few dollars. In gold, where daily volatility can run to tens of dollars, that difference is meaningful and your definitions need to stay constant.

When it works and when it does not

OTE and the premium/discount filter work better in orderly markets with deep pullbacks. On strongly trending days, for example after a surprise inflation print, gold may retrace only 38 percent or even less before moving again; someone waiting only for OTE misses the move. On reversal days, by contrast, price goes through 79 percent as well and breaks structure.

It is therefore better to treat OTE as a zone that is worth examining if price gets there and other signs are present. Record in what percentage of cases price reached OTE at all, and in what percentage of those structure held. These two numbers give you a more realistic picture than any general claim.

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Frequently asked questions

What is OTE in Smart Money Concepts?

OTE, or Optimal Trade Entry, is the 62 to 79 percent retracement zone of a move, regarded in the ICT style as a place to consider entries in the direction of the trend; the 70.5 percent level is often watched as its midpoint.

How do I identify premium and discount?

Choose a valid dealing range, from a swing low to a swing high, and draw its 50 percent level. Above it is premium and below it is discount.

Do Fibonacci levels work precisely on gold?

Fibonacci levels have no scientific basis for precision and are better treated as zones. Their value lies mainly in overlap with other factors such as structure, order blocks and high-volume areas, and should be verified by your own testing.

Education only, not a recommendation to buy or sell; we never give signals. Price examples are illustrative. Test any method on a demo account first, with strict risk management.