Nowadays, Japanese candlesticks are so ubiquitous in all forms of trading, that even the newly emerged crypto industry has borrowed it. However, candlesticks were popularised in the West quite recently — about 25 years ago. The first person who revealed the candlestick charts to the western hemisphere was Steve Nison, who wrote a book called “Japanese Candlestick Charting Techniques”, initially published in 1991.

Steve Nison and his book

Before Steve wrote the book, he travelled to Japan and was fascinated by the way Japanese traders looked at the market. Keep in mind that at that time, pretty much no one knew about Japanese candlesticks and the bar charts dominated the western market. Steve Nison, who was brought up on the teachings of Charles Dow, was very surprised to see that Japan already had an established groundwork of the technical analysis, which did not originate from the works of Dow. So who made this possible?

The rice billionaire

The father of Japanese candlestick is considered to be Munehisa Homma, who was born in 1724 in the city of Sakata, which was a major port and one of the centres of rice trade. The Homma family owned vast rice plantations and also engaged in rice trade.

In 1750, after the death of his father, Munehisa, being the youngest son, started managing family capital. This happened contrary to the tradition according to which the eldest son became the heir of his father’s business, and could testify to his remarkable commercial abilities. At this time, a rice exchange also appeared in Sakata. Homma traded on it for several years and then transferred his activities to Osaka and Edo, where he made a considerable fortune.

Munehisa Homma

It is rumoured that Munehisa had achieved such a level of proficiency he at one point made one hundred profitable transactions in a row, and there is information, that Homma made the equivalent of $10 billion in today’s dollars trading in the Japanese rice markets. Indeed, it sounds dubious, but then again, we are talking about the father of a system which is still used to this day!

Later, when the government officially authorised the exchange trade in rice, he was invited to work as a financial adviser and was granted the title of a samurai.

In medieval Japan, rice was not only the main food crop and raw material for many products and goods, but it also was the basis of the well-being of society. For example, in the conditions of inevitable depreciation of money, the government collected taxes and paid salaries in rice.

Japan’s largest rice exchange called Dojima was located in Osaka, with more than 1,300 merchants operating during its heyday. Prices at the Osaka Exchange have influenced the cost of rice throughout the country.

Until about 1710, only physical trading in rice was carried out on the exchange. Later, the practice of dealing with so-called “rice coupons” arose (in modern terminology, they would be called rice futures). Each coupon was a receipt for the supply of rice for the next harvest, sometimes for several years in advance. Such receipts were issued by large feudal lords. The coupon could pass from hand to hand, and its price varied depending on market expectations (both supported by objective factors — weather, stock volumes, future harvest, and speculation).

Ying and yang

So how did Homma achieve such levels of success? Without a doubt, he took advantage of the access to insider information. Thanks to his tremendous wealth and influence, he had access to any news about the state and market conditions. Besides, for many years he conducted regular observations of the weather, which is pretty much the fundamental analysis for rice.

There is also evidence that suggests that he created his line of communication, basically a “human telegraph”, to receive information about the price difference in real time. All the way between Osaka and Sakata (600 km), he placed signalmen on the roofs of buildings, hilltops and mountains, who used different flags to relay information on trades and orders for transactions, giving Homma an instant (by the marks of the historical period) information about any rice price fluctuations.

However, his most important achievement was the desire to understand the “psychology of the market.” For 15 years, he studied the price of rice in the entire history of trading to identify patterns of behaviour of traders on the exchange and found that the psychological aspect is crucial for successful operations in the financial market, and emotions of traders have a decisive influence on the price of rice.

Homma also described some frequently occurring price movements. In the process of studying such movements, he developed a method to display four prices at once instead of one: minimum, maximum, opening and closing. This method is known to this very day as the “Japanese Candlestick.”

Homma is also credited with the authorship of a book published in 1755 under the title “ The Fountain of Gold — The Three Monkey Record of Money” — the first manuals on market psychology and technical analysis. In this book, Homma described many methods of analysis used in our time and derived the primary rule of price dynamics. It is considered to be one of the first books to study the psychological aspect of the market. Homma realised that traders’ emotions have a significant influence on rice prices and he noted that recognising this can enable one to take a position against the market.

He also described the rotation of Yang (a bull market), and Yin (a bear market) and laid out the principle of their alternation: “A market that has risen should eventually fall, and a market that has fallen will eventually rise”.