Trading rice in 18th century Japan. Or trading Apple in 2019. You might think they are worlds apart. But Candlesticks works the same way now as they did back when the samurais used them to get rich, 200 years ago. Because human nature rarely changes.
The samurais originally used Candlesticks to speculate with the taxes they received in rice. And their probable inventor was a Japanese rice merchant named Munehissa Homma. Homma went on to make lots of money trading with Candlesticks. And you could do the same today. But first a bit of background on Candlesticks.
Candlesticks were invented in 18th century Japan. And the purpose was to use them for speculation in the Japanese rice markets. Because in those days farmers used to pay their taxes in rice. Therefore, rice was the main source of income and taxation for the samurai class. And this made them rich and wealthy, with a privileged lifestyle.
To keep up their lifestyle the samurais began to speculate with the rice proceeds that they kept in storage. Further, they began to sell future harvests through futures contracts. And this speculation evolved into the first futures market.
An edge through technical analysis
Munehissa Homma was born in 1724 and lived until 1803. He started his trading career in the port town of Sakata. Which is why the ”Sakata rules” are often mentioned when people are talking about Candlesticks. Homma later went on to trade in Tokyo. But instead of chopping the heads of his competitors, Homma started to outsmart them, through the use of candlesticks. And many consider Munehissa Homma, also called Sokyu Homma, to be the inventor of Candlestick charts.
Homma did extensive research on investing psychology going back to the 17th century. And he started to draw his charts by hand. For this he used a network of runners to communicate prices, between Sakata and Osaka. Since it was obviously no computer technology back in those days, that could communicate those prices.
One of the richest traders ever
If the legends are true Homma is one of the best traders in History. He made the equivalent of ten billion dollars trading with Candlesticks, in today’s money, if the stories are true. So good was Homma that he later became financial advisor to the Japanese government. He was also appointed “honorary samurai”. A pretty fantastic story indeed.
Drew on rice paper
Homma recorded price movements in the rice market on paper made out of rice plants. And that is how he drew his candlestick charts, by putting down the open, close, high and low of the day. He soon began to find patterns in his notes and give them names. This later became dojis, stars, spinning tops, hanging men and other Candlesticks patterns. And this gave him a huge advantage over other traders and samurais.
The fountain of Gold
Homma wrote a book in 1755 called ”The fountain of Gold – The three monkey record of money”. In this book he says that it is critical to understand market psychology, if you want to become a good trader. He also said that emotions deeply influences the market and its price action. He talks about contrarian trades to position yourself against the crowd. And about the trends of negative and positive sentiment. All things that relate to our innate human nature and are observable through candlesticks.
Trading with Yin and Yang
Homma described bull markets as Yang and bear markets as Yin. He also wrote that they had instances of each other within each other. So for example pullbacks against the trend would occur in what we today call a bull market. And these corrections were yin sentiments, according to Homma. Or as Dow Theory would call them, minor reactions against the primary trend.
Similarities with Dow theory
There are many similiarities between this early version of technical analysis and Dow theory, which is a version of technical analysis that arose in the west, about a 100 years later. For example, how the systems look at price action, trends, sentiment and market psychology. But also the notion that price is all the information that a trader needs to be successful.
Some sources say that it is unlikely that Homma ever used Candlesticks. And that it is more likely that they were invented later, during the Meiji period, in the late 1800s. But who ever invented them probably made lots of money with them. Because they are still used for that purpose today.
Read more: To learn more about basic Candlestick construction, shapes and trading you should read my post on the Introduction to Candlesticks. There are also countless of books on candlestick trading that are helpful. For example, Steve Nison’s Japanese Candlestick charting, The Candlesticks course and Beyond Candlesticks: New Japanese Charting Techniques Revealed.