History Of The Candle Charts

HISTORY OF THE CANDLE CHARTS

I Hg fapanese were the first to use technical analysis to trade one of the
world's first futures markets-rice futures. The Japanese started trading
in this market in the 1600s. Interestingly, the birth of the Japanese rice
futures market was a consequence of the country's military history.

After a century of internal warfare among the daimyo ( Japanese feudal
lords), General Tokugawa Ieyasu, who ruled from Edo (the ancient
name of Tokyo), won the famous battle at Sekigahara in 1600. This was
the battle that helped unify fapan. Tokugawa thereafter became Shogun
of all ]apan. After his victory over the daimyo, General Tokugawa cleverly
required that all the feudal lords live in Edo with their families. When
the lords returned to their respective provinces, the entire family stayed
at Edo as hostage. The feudal lord's main source of income was rice that
was collected as tax from the peasants who worked their land. 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.

Because all these powerful daimyo lived so close to each other in Edo,
they attempted to outdo one another in lavish dress, mansions, and other
luxuries. This was reflected by a popular saying at the time, "The Edoite
will not keep his earnings overnight." This showed that the daimyo in
Edo were seen as spendthrifts with an expensive lifestyle. To maintain
this lifestyle, the daimyo sold rice from their warehouse in Osaka; sometimes
thev even sold rice from future harvests. The warehouse would
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issue receipts for this future rice. These were called empty rice contracts
("empty tice" 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 engendered much speculation, and it was from
this speculation that Japanese technical analysis was born. The most famous
trader in the rice futures market was Homma. Homma traded in
the rice futures markets in the 1700s. 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 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).

whether or not Homma invented charting is open to question. But
determining whether one person, in this case Homma, created charts or
used them to trade is not too important. There is a tendency in the West
to be preoccupied with imposing authorship to one person. It is more
likely that the candle charts we know today and all the techniques associated
with them tended to be a process of cumulative authorship by
several people over many generations. Even if he did not invent candle
charts, Homma understood that the psychological aspect of the market
was critical to his trading success. And it appears that the earliest forms
of technical analysis in Japan dealt more with the psychology of the
market rather than charts.

In the book, The Fountain of GoId-The Three Monkey Record of Money,
purportedly written by Homma, the author states: " After 60 years of
working day and night I have gradually acquired a deep understanding
of the movements of the rice market." The book then goes on "when to say: all are bearish, there is cause for prices to rise. when everyone

is bullish there is cause for the price to fall." This phrase echos what is
now called contrarian opinion, a tool important to so many traders. yet,
The Fountain of Gold-The Three Monkey Record of Money, was written in
1755.It is amazing that before America was a nation, the Japanesew ere
trading with contrarian opinion! The title had me perplexed for some

time. I did not understand the reference to the "three monkeys" in the
title. Then in some of my translated material, it said something about
comparing successful trading to being like the three monkeys we all knew
as children-see, hear, and speak no evil. Then it dawned on me; the
title of the book, The Fountain of Gold-The Three Monkey Record of Money,
means that for traders to get to their "fountains of gold," they should
have the characteristics of these three monkeys