Learning how to read and interpret charts is an essential step in order to understand price behavior. Among the various charts available in trading, Japanese candlesticks are the most popular. This section of our trading education is dedicated on covering some of the history behind this very popular tool.
Candlestick charting first appeared sometime after 1850. Up until about 1710, only physical rice was being traded. Later a futures market emerged where 'coupons', were issued, which were records of promise of delivery of rice at a future time. This is the beginning of futures trading.
The main source of income of feudal lords in Japan at the time was by taxation. Farmers paid the tax in the form of rice which they were growing in the fields. Since this rice could not be transported from the lords’ provinces all the way to the battlefield of Edo, they set up warehouses in the port city of Osaka to store their rice.
In order to maintain their high lifestyle they had to not only sell the rice they had stored in warehouses in Osaka, but also sell the rice from future harvests.
The warehouse would issue receipts or coupons for this “future rice”. These were called empty rice contracts 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 require much speculation, and it was from this speculation that Japanese technical analysis was born.
Much of the credit for candlestick development and charting goes to a legendary rice trader named Homma Munehisa from the town of Sakata, Japan in the 17th Century. Homma is often referred as “The Father of The Japanese Candlestick Charting” and his trading success reputedly led to him becoming an honorary Samurai.
Charting was introduced to the Western world by Steve Nison in his book, ‘Japanese Candlestick Charting Techniques.’ Nison understood the surprising power of Japanese candlestick charts and popularized this method to the Western Hemisphere and he is acknowledged as the leading authority on the subject. It is likely that his original ideas were modified and refined over many years of trading eventually resulting in the system of candlestick charting that we use today.
With the arrival of the candle charts, Japanese technical analysis flowered as people started thinking in terms of signals and trading strategies. Patterns were developed and market prediction became more important. Trying to forecast the market took on extra importance in the 1870s when the Japanese stock market opened.
Bar charts were probably one of the ancestors of the more evolved and productive Japanese Candlestick Charts. In essence, this means that since most of the West is still using bar charts, it is also using a less evolved form of charting than the Japanese are with candle charts.
Because Candlesticks display the relationship between the open, high, low, and closing prices, they cannot be displayed on securities that only have closing prices, nor were they intended to be displayed on securities that lack opening prices.