Many traders use Japanese candlestick charts every day in their market analysis. But, did you ever wonder why there are so many military references in the names of the formations?
In this article, the author outlines some background and history of Japan, which set the stage for the development of what can be called the oldest form of technical analysis. –Editor’s note.
As the name suggests the candlestick charting theory was developed in Japan. As one delves into the various Japanese candlestick formations, we find many “war-like” references, for example: “morning attack” and “three advancing soldiers.” The origins of candlestick charting theory date back to 1500-1600, a century where Japan was at war within its territories. That was a period of great turmoil for Japan.
RICE, DOUGH AND CAKE
The turmoil eventually resolved through the effort of three generals: Nobunga Oda, Hideyoshi Toyotomi and Leyasu Tokugawa. Their achievements are described as “Nobunga piled the rice, Hideyoshi kneaded the dough and Tokugawa ate the cake.” They helped end the war and helped united the country into one. The Tokugawa family ruled the country from 1615-1867, which was known as the Tokugawa Shogunate Era.
TRADING IS LIKE WAR
When we read through candlestick books and articles, we see many military terms used in the names of the formations. That stems from the persistent military environment which was the primary backdrop for that era. In some ways, trading is like a war and tactical abilities are required to win or profit. Aggressive maneuvers are required to achieve final success.
COMMERCIAL ACTIVITY
In Japan, the resulting military and political stability which unfolded contributed to the development of commercial markets, especially in places like Osaka. The town’s seaside location helped create a booming commercial center there. Osaka was called the “kitchen of Japan.” The town was home to many rice storage warehouses.
THE FIRST RICE EXCHANGE
There were four classes in Japan: the soldier, the farmer, the merchant and the artisan. One successful rice merchant named Yogoda Keian did so well that his yard expanded into the first rice exchange named Dojima Rice Exchange. After 1710 actual rice trading expanded into issuance and negotiating for rice warehouse receipts which were the first form of futures and that became the medium of wealth for the city.
RICE BECAME MEDIUM OF EXCHANGE
Rice became the medium of exchange. One could get money by selling surplus rice in the exchange and get the receipt which could be sold any time for money. At times crops were also mortgaged to take care of future expenses.
Rice coupons were also called “empty rice coupons,” or rice that was not in physical possession. Rice futures trading became so established in the Japanese market place that in 1749, 110,000 bales of rice were freely traded despite the fact that there were only 30,000 bales in existence throughout Japan.
THE FATHER OF CANDLE THEORY
This background and history lay the groundwork for the development of tracking rice price movements. A man named Munehisa Homma is credited for developing Japanese candlestick theory. He kept records of market psychology, learning to boost his profits by carefully monitoring prices and not rushing into trades.
At the time, Homma was called the finest trader ever. It was said that he had over one hundred winning trades in a row and he was considered a legend in his own time. His family’s trading firm was moved from the town of Sakata to Edo. Homma’s research and findings are known today as “Sakata Rules.”
STEVE NISON
Candlestick charting has been used by traders in Japan for hundreds of years and it was only in recent decades that this charting method was introduced to the West. Steve Nison, author of Japanese Candlestick Charting Techniques, published in 1991, is widely credited with bringing these important concepts to western traders. Much of the historical research mentioned in this article is credited to Nison as well.
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