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Futures 4 Fun: Trading Futures with Monkey Bars

July 1, 2013

If you’ve been around the thinkorswim® universe, you might’ve heard of Monkey Bars. Funny name. Serious chart concept. Monkey Bars charts were built with futures traders in mind, and they show the price level where most trading action occurs over a particular time frame (the “Monkey Bar”) and the range where 70% of the trading action happens (the “Playground”). And with a liquid product, the chart ends up looking like a bell curve turned on its side.

Balanced Market

As long as price action isn’t departing from what most other traders are doing, the market is balanced and orderly, and the boundaries of the Playground likely represent support and resistance (Figure 1).

FIGURE 1: BALANCED MONKEY BARS. The Monkey Bar is the middle set of numbers inside the yellow band. The Playground is the set of numbers inside the shaded area. Chart from TD Ameritrade’s thinkorswim®. For illustrative purposes only. Not a recommendation of a specific security.

In a balanced and orderly liquid market, as a short-term trader, you might feel okay swing trading the moves from boundary to boundary. Since the Monkey Bar, as the most-traded level, represents a virtual magnet that attracts price, you might look for directional trades entered near a boundary with a target at the Monkey Bar. On the other hand, if probability is your playbook, then build risk-defined spreads outside the boundaries and find areas unlikely to be touched by all trades but the statistical outliers.

Unbalanced Market

Liquid markets don’t always stay balanced, and that’s the reality of trending prices. Just like on the playground of my youth, sometimes the game moves away from where you’re playing. You can stop playing, or you can move to where the action is.

Monkey Bars show when price is moving to a new area—i.e. a new playground. Breakout traders will recognize this as a resistance or support break. Because liquid markets require volume to experience significant price movement, institutional participation is likely taking price to a new Monkey Bar. This swing from bar to bar yields a skewed or sometimes double-bell curve (Figure 2). Look for directional trades entered as price moves outside the boundary of the Playground.

FIGURE 2: UNBALANCED MONKEY BARS. When the Playground moves to a new area, the chart builds a second bell-shape curve (lower curve shown here). For illustrative purposes only. Not a recommendation of a specific security.

Active trading is a little like falling off the monkey bars of our youth. The best thing that could happen when playing on the monkey bars was to have lots of other kids below you. Why? They would break your fall if you slipped off the bar. Sure, you might get an elbow in the eye, but you’d be saved from a face full of gravel. Active traders deal with lots of other participants, and when playing inside a liquid market, yeah, you might get hurt, but hopefully there’s someone below you to cushion your fall.

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