Candlestick History

Candlesticks draw an inductive, as opposed to deductive, view of markets. Centuries ago, candlestick chartists drew their charts on a scroll of rice paper, from right to left, with a crow quill and India ink ground by hand. Yes, there was probably a Heron wading in a carp pond somewhere in the scene... Spend a bit of time analyzing traditional candlestick formations and you will begin to see how the patterns spell out market forces and investor psychology. Candlesticks have a rich history that extends far beyond their relatively short, 30-year period of popularity among today's traders.

The argot of candlestick charting is replete with war references, for at its advent in 16th and 17th century Japan, the Daimyo (feudal lords) waged constant war. This period is known as Sengoku Jidai, or "Age of Country at War," a time of turmoil that gradually came to order in the early 1600's under the leadership of Nobunaga Oda, Hideyoshi Toyotomi, and Leyasu Tokugawa. Their leadership remains legendary in Japanese folklore. The collective achievements of these Daimyo are summarized in the saying, "Nobunaga piled the rice, Hideyoshi kneaded the dough, and Tokugawa ate the cake." The effect of their leadership was a unified Japan. It was during this highly militaristic period that candlestick charting was developed. Hence the extensive military argot that characterizes investing as battle, a metaphor that is not difficult to justify. As a field general must draw on proven tactics, apply tested strategies, and face risk, so must an investor.

Osaka became Japan's capitol during the Toyotomi reign. As a sea port, it was an ideal commerce center. Land travel was slow and often dangerous, even if necessary for many, yet these land passages eventually converged on Osaka, and the port quickly emerged as a major trade hub. Warehousing and distributing commodities by sea and land, Osaka evolved into Japan's largest financial center, and in time, Osaka's financial influence stabilized regional imbalances in rice prices.

At this time, Japan's four social classes, the soldier, the farmer, the artisan, and the merchant, were ruled by a military government known as the Bakufu, who were growing increasingly weary of the merchant class. One merchant, Yodoya Keian, was a particularly successful rice trader due to his ability to transport, distribute and set the price of rice. He was so successful that his front yard became Japan's first rice exchange. The Bakufu charged Keian with living a life of luxury beyond his social rank, and "relieved" him of his fortune. With Keian out of the way, several competing rice merchants attempted to corner the rice market. The Bakufu upped the ante. They not only confiscated these merchants' wealth, they sent them into exile after executing their children. This discouraged greed in the merchant class for many years.

The Tokugawa Shogunate introduced greater stability to Japan and new opportunities emerged. Tokugawa centralized Japan's government, which slowly undermined the feudal system and made local rice markets national. The resulting economic expansion increased the use of candlestick charting as a tool for tracking rice price activity.

The Dojima Rice Exchange, its roots in Keian's front yard, was formally institutionalized in the late 1600's. Merchants graded rice and negotiated their fair market value. After 1710, rice trading expanded into the issuance of and negotiation for rice warehouse receipts, or rice coupons, the earliest form of modern futures, and rice became the bedrock of Osaka's economy. 1,300 rice dealers occupied seats on the Dojima Rice Exchange.

After a debasing of the Japanese currency, rice became the preferred currency. A Daimyo in need of money could send his surplus rice to Osaka, get a warehouse receipt, and sell it at a greater profit. Selling harvests and mortgaging future crops became commonplace.

The rice coupon made the Dojima Rice Exchange the world's first futures exchange. Rice coupons were known as "empty rice"--rice not in physical possession, or rice that had not been harvested. Rice coupon trading became so prominent that in 1749, 110,000 rice bales were freely traded while only 30,000 bales existed in all of Japan.

It was at this time that Candlestick trading became more refined. Until this time, candlestick analysis was merely a tool to track the price of rice. In the mid 1700's, however, Munehisa Homna inherited his family's trading business and applied candlestick charting in a new way. He researched the historic movement of rice prices in context of seasonal weather conditions. His research established interpretations that he applied with great success. His findings are known as the "Sakata Rules."