Japanese Candlesticks

The Japanese candlesticks have no real date of birth and we don’t know who invented it. They are possibly the result of a collective work, and of successive developments in time. In the XVII century, the Japanese began to use the technical analyses in the rice trade.

 

In the XVIII century, a legendary trader by the name of Mister Munehisa Homma (born in 1724 in Sakata, Japan) became one of he richest men in Japan by using a system of graphic representation of the rates known as the Japanese Candelsticks. Mister Homma nicknamed ‘the markets god” » was the son of a rich merchant’s family. Homma was interested in the rice selling price.

As the prices of the rice changed a lot, Homma created a system that enabled him to know the evolution of the rice exchange rates.

He put men on the roofs of houses between Sakata and Osaka (about 500 km), these men gave him information about the evolution of the exchange rates, with the use of flags. Thanks to this system, he quickly earned a lot of money which he speculated on the prices of rice in the Dojima Eice Exchange in Osaka. He changed his system into a graphic configuration easy to interpret. The candlesticks were born….

Thanks to this system, Homma speculated in Edo (nowadays Tokyo) and created a very important fortune that he was soon considered the richest man in Japan. A legend says that “one day he made a hundred consecutive financial operations and did not lose any one.” A few years before he died in 1803, he received the title of Samurai; Homma left two books about his graphic technique: Sakata Senho and Soba Sani No Den.

It was in the 1990s when the traders rediscovered the Japanese candlesticks,  thanks to Steve Nison. Now they are used by a large number of the investors in the world.

Here are the representation of the Japanese Candlesticks. The red candlestick represents a bearish candlestick (it is also often represented in black), the green candlestick represents the bullish candlestick (it is also often represented by a white candlestick).

 

To draw a Japanese candlestick, it is necessary to know: the opening price, the closing price, the higher and the lower level.

A candlestick is made up of a body (large part) and in general with two shadows (vertical line below and above the body).

A green or white candlestick means that the closing has been higher than the opening price, and to the contrary, a red or black candlestick means that the closing has been done under the opening price.

 

The Japanese candlesticks are a graphic representation that enables one to visualize technical configurations such as the: hammer, the doji, the shooting star, and the hung, as well as several other configurations that make clear the entry or exit signals on the markets.

 

Before studying the different technical configurations formed by the Japanese candlesticks, let’s first study the different shapes that the candlestick can have.

 

The candlesticks can have the « marubozu » shape (black or white – red or green) also called “long” (black or white – red or green). These candlesticks represent a strong purchasing or selling presence. In fact, the opening corresponds to the lower level whereas the closing corresponds to the higher point for a green marubozu and the opposite for a red marubozu.

 

They can have the shape of :

• “Bullish belt loops” which indicate a possible future bullish tendency if the candlesticks are in a rather low price area.

 

• «Bearish belt loops» which indicate a possible future bearish tendency if the candlesticks are in a rather high price area.

 

• «Hammers» which are the sing of a bullish reversal when they are on the low points of a bearish tendency. These are called “hung” when they are on high points of a bullish tendency, they announce a bearish exchange rate easing

 

• “High waves” that can be the signal of a tendency reversal.

 

• “Inverted hammers” that can be the sign of a bullish tendency change when they are in a bearish market. When they are on the highs of a bullish tendency, they are called “shooting stars” and are announcing an exchange rate easing.

 

• “Dojis” which translate a great indecisiveness of the stakeholders, a fight between the people who supply and the people who demand, between buyers and sellers. The dojis represent candlesticks that show the closing has been at the same level as the opening. They indicate in general a future important exchange rate movement.