Sunday, February 13, 2011

Market Profile-->TOS Monkey Bars

It is not often that I find a new tool that I am super excited to add to my tool box. But recently TOS released what they refer to as Monkey Bars. Monkey bars are based off the principles of Market Profile, which was origanally developed by J. Peter Steedlmayer in the 1980's in conjunction with the Chicago board of trade. Back when futures were not global, market profile was a way to tag where prices went off in each 30 minutes of the day. In short they basically used letters for each period and by the end of the trading session you would have a distribution of prices for that trading session. But as the session went on you could start to see what Peter deemed the "fair price" or the mean that all the other trades would trade above and below, think of a normal distribution. The basic idea is that as the session developed you would be able to identify TPO's (time price opportunities) where unfair prices would become obvious, trades that were out of the value area (where 70% of the volume had gone off). And basically depending on your motives in the market you could take advantage of opportunities using Market Profile. Although market profile is not a trading system, its principles and visual representation are a great way to view the markets in my opinion and very intuitive. Before this I had been convinced that candle stick charts were the best way to view price action or the "auction process" until watching the brief demo of Monkey Bars the other day. I have started to read the 346 page PDF that is on the CME website for free on the original principles behind Market profile. You can find a brief explanation of market profile and the PDF at the following link: http://www.cmegroup.com/education/interactive/marketprofile/





 Now onto Monkey Bars. TOS and their genius programers developed their version of market profile based on the original concepts with some modifications to adjust for a market that is now open almost 24 hours a day. The original market profile used letters to distinguish a change in period, where monkey bars uses 0-9 and then a color coating scheme with 10 different colors. Lets take a look at a few basic Monkey bar charts the most closely resemble the original market profile concept.

Crude:

Chart specifics:
1) First trade of the session is highlighted with a orange rectangle.
2) Color represent the following trade sessions: Purple (After hours of main US session), Blue (Asian 
    Session), Pink or flesh color (European session), Grey and Yellow (US session).
3) The solid Yellowish bar represents the "Fair value" or mean. This is what TOS refers to as the Monkey
     bar as price likes to hang around this area. Also refered to as the point of control. Think mean reversion.
4) Highlighted grey/black section represents the value area. TOS refers to this section as the play ground.
    This is where 70% of the trades are taking placed based on volume.
5) Trades outside the value area are considered unfair.
6) The little Orange triangle represents where the last trade took place for that session.


 The above chart is 30 minute chart showing the last 5 sessions of the March crude contract. Now focusing on Fridays price action for a moment...notice how during the US session (grey) that period 6 and 7 were testing for a bottom around $85.10. Then period 8 shows us that the sellers have been exausted and crude begins to trade up as buyers come in to correct the "unfair price". Depending on your time frame this would had been a good place to buy with little risk to the downside. Now there is much more explanation for this but to much for me to explain in this posting. If you you want to know more, you will have to read up on this and/or attend the TOS seminars.

Monkey Bars Extended:



 Now this is where the genius of TOS really came in. They programed it so that if you wanted to you could see the market profile in the form of a bar chart while leaving the value area and point of control on the chart. Also what had never been done before is the ability to overlay studies like the volume study that I have in the above chart as well as all the other studies you might normally look at like moving averages, bollinger bands, etc.

 Take some time to compare the two charts, they have the same information, they are just laid out differently. For me studying the second chart allowed me to better understand and look at the first chart.

Anyways that is all the time I have right now to talk about this. But please feel free to ask questions or make comments. I just wanted to put this out there for anyone who may be interested. Like I mentioned at the begining of this post, I am very excited about this new tool. Yet I still have a lot to learn about it, but I feel like I have a pretty solid understanding of the basic principles behind market profile and therefore TOS monkey bars.

Good Luck Trading!!!

P.S.

Here is a great book you can check out to better understand monkey bars and the market profile:

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