History of Japanese Candlesticks

What is the history of Japanese Candlesticks Charting?
This is an ancient Japanese method of technical analysis, used in trading rice in 1600's. It was used in trading rice contracts from 1710 onwards. So candlesticks are also called 'Japanese Candlesticks' or simply 'Japanese Candle'.

The history of candlestick charting dates back to 16th century. It was developed by Japanese traders in 1600's, to trade rice contracts. Until about 1710, only physical rice was being traded. Later a futures market emerged where 'coupons', were issued, which were records of promise of delivery of rice at a future time. This is the beginning of futures trading.

How did the first Futures Trade started?

General Tokugawa Ieyasu

General Tokugawa Ieyasu

Painting of The City Edo

Painting of The City Edo

Painting of The City Edo

Painting of The City Edo

Merchants Shops in Edo old town

Merchants Shops in Edo old town

Port of Osaka

Port of Osaka

The area of Japan was ruled by a group of “Daimyo” feudal lords in the 15th century. Being small rulers, they continuously had internal war among them. Finally General Tokugawa Ieyasu, who ruled from Edo won the famous battle at Sekigahara in 1600. This victory gave birth to the present unified Japan.

To be in power General Tokugawa had to keep all the feudal lords under his control. He cleverly made all the lords to live in the city of Edo with their family. When ever they have to go to their respective provinces they have to leave their families at Edo. This stopped them from conspiracy because Their families were indirectly kept as hostage.

The main source of income of feudal lords was by taxation. The farmers were paying the tax in the form of rice which they were growing in the fields. Since this rice could not be transported from the daimyo's provinces all the way to Edo, they set up warehouses in the port city of Osaka to store their rice.

Back at Edo the daimyos were living with an expensive lifestyle, in competition with each other. To maintain their lifestyle they had to not only sell the rice they had stored in warehouses at Osaka, but also sell the rice from future harvests.

The warehouse would issue receipts or coupons for this “future rice”. These were called empty rice contracts since the rice was not in anyone's physical possession and they were sold in the secondary market. This was the beginning of one of the world's first futures market.

Trading in rice futures needed much speculation, and it was from this speculation that Japanese technical analysis was born.

Who was Homma Munehisa?

Homma Munehisa

Homma Munehisa

Present Sakata City

Present Sakata City

Osaka Securities Exchange

Osaka Securities Exchange

Greater Osaka

Greater Osaka

At this juncture Homma Munehisa (1724-1803) a rice trader from Sakata, Japan, organized this ancient wisdom, developed and used Japanese candlestick charting very successfully. He traded rice contracts in the Ojima Rice market in Osaka during the Tokugawa Shogunate also known as the Tokugawa bakufu - a feudal regime of Japan established by Tokugawa Leyasu and ruled by the shoguns of the Tokugawa family.

This period is known as the Edo period and it gets this name from the capital city, Edo, which now is called Tokyo. This time is also called the Tokugawa period or pre-modern (Kinsei).

Homma Munehisa is often referred as “The Father of The Japanese Candlestick Charting”. His trading success reputedly led to him becoming an honorary Samurai. His methods are the oldest example of technical analysis documented.

Stories claim that Homma established a personal network of men about every 6 km between Sakata and Osaka (a distance of some 600 km) to communicate market prices.

He discovered that although there was a link between the supply and demand of rice, the markets were also strongly influenced by the emotions of the traders. Because of this, there were times when the market perceived a harvest as different from the actual.

He reasoned that studying the emotions of the market could help in predicting prices. In other words, he understood that there was a difference between the value and the price of rice. This difference between price and value is as valid today with stocks, bonds, and currencies, as it was with rice centuries ago.

In 1755, he wrote San-en Kinsen Hiroku, The fountain of Gold - The Three Monkey Record of Money which is the first book on market psychology. In this, he claims that the psychological aspect of the market is critical to trading success and that traders' emotions have a significant influence on rice prices. He notes that this can be used to position oneself against the market.

In this the author states that " After 60 years of working day and night I have gradually acquired a deep understanding of the movements of the rice market.... When all are bearish, there is cause for prices to rise. when everyone is bullish there is cause for the price to fall."

He describes the rotation of “Yang” (a bullish market), and “Yin” (a bearish market) and claims that within each type of market is an instance of the other type. This is what we call as trend and counter trend.

He appears to have used weather and market volume as well as price in adopting trading positions. He is considered the most successful market trader in history, generating over $100bn in profits at today's prices, some years earning over $10bn a year.

Some sources claim, he has authored two other books, - 'A Full Commentary on the Sakata Strategy' and 'Tales of a Life Immersed in the Market'.

The Japanese candlesticks charts became very popular due to the level of ease in reading and understanding the graphs. The Japanese rice traders also found that the resulting charts would provide a fairly reliable tool to predict future demand.

Steve Nison, understood the startling power of Japanese candlestick charts and popularized this method to the Western Hemisphere. He is acknowledged as the leading authority on the subject. Articles written by Steve Nison that explain Candlestick charting appeared in the December, 1989 and April, 1990 issues of Futures Magazine. He has written a definitive book on the subject, by name Japanese Candlestick Charting Techniques.

Controversy: In Beyond Candlesticks, Nison says, "In the material I had translated, candle charts are often called Sakata charts in reference to the port city of Sakata, where Homma lived. However, based on my research, it is unlikely that Homma used candle charts. As will be seen later, when I discuss the evolution of the candle charts, it was more likely that candle charts were developed in the early part of the Meiji period in japan (in the late 1800s)."

Evolution of the Japanese Candlestick Charts

With his research Steve Nison explains the evolution of the Candle Charts.

1. Stopping chart: These are also called as point charts, line charts or star charts. This was the earliest type of chart and was drawn by joining only closing prices. The name came from the fact that each point or a star is where the prices stopped by the end of the session.

2. Pole chart: This chart added the extra information by showing the range between the high and the low of the session. These lines show not only the direction of the move, but the extent of the move for each session. Since each representation of ranges appears as vertical lines they were called as pole charts.

3. Bar chart: These are most commonly used charts in the western world. This is a combination of the stopping charts and pole charts. They show not only the range of trading session by depicting the highs and lows, but also show open and close points, using open, high, low and close prices. Some charts may not show open price. They use only high, low and close prices.

4. Anchor chart: These are supposed to have originated in the Kyoho Era from 1716. The usual meeting place for rice traders was port cities. So they might have taken a cue from anchor to create this chart. The top and bottom of the anchor's vertical line are the high and low of that session. The horizontal line of the anchor line is the open. The arrow of the anchor line is the close. If the close is higher than the open, the anchor points up and if the close is lower, the anchor points down.

5. Candle chart: The next improvement from the anchor charts was the Japanese Candlestick Chart. The candles probably started in the early part of the Meiji period from 1868. Candle lines were a refinement of the anchor chart. The use of black and white real bodies made analyzing the underlying supply and demand situation visually easier to determine than with the anchor charts.

With the arrival of the candle charts, Japanese technical analysis flowered as people started thinking in terms of signals and trading strategies. Patterns were developed and market prediction became more important. Trying to forecast the market took on extra importance in the 1870s when the Japanese stock market opened.

Steve Nison opines that bar charts were one of the ancestors of the more evolved and productive Japanese Candlestick Charts. In essence, this means that since most of the West is still using bar charts, it is also using a less evolved form of charting than the Japanese are with candle charts.

Because Candlesticks display the relationship between the open, high, low, and closing prices, they cannot be displayed on securities that only have closing prices, nor were they intended to be displayed on securities that lack opening prices.

Click here to buy books on Japanese Candlesticks

Equivolume charts are not really candlestick charts, because they contain only bodies. They do not contain wicks. Open and close prices are not indicated on the symbols. 

Click here to read and learn more about Japanese Candlestick Patterns

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