How Were Candlestick Charts Invented?

This is the story of how Japanese candlestick charts were discovered and became so popular.

Alright, slightly off-piste here.

But if you’re a market and trading nerd like me, you’ll appreciate this bit of history.

Interesting and you never know, it might be the tiebreaker in a pub quiz one day…

Have you ever wondered about the candlestick chart?

How it came about and who invented it?

Is that a YES I hear you cry? I thought so…

Let’s begin…

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I’m sure that you use candlesticks regularly, but I bet you don’t know the history.

We have to go back in time to the early 1700s.

The city is Osaka – today, it’s Japan’s third-most populous city.

It was among the three most important cities then as well, with a population of about 400,000.

At the time, people didn’t estimate the wealth in terms of Lamborghinis, yachts, Rolex watches, or piles of cash.

The most valuable thing was… Rice.

Feudal lords, called daimyōs, received their income in the form of rice.

Japan’s entire economy was actually based on rice.

Since it functioned as money, merchants in Osaka started to build massive storehouses to store daimyōs’ rice safely.

They charged a fee either as coins or a receipt, which eventually led to the familiar paper money.

These merchants not only stored rice but also made loans, becoming powerful rice brokers.

They built shops around a region called Dōjima.

In 1697, merchants and money changers established the Dōjima Rice Exchange – the first futures market in the world, which facilitated the trade of rice that hadn’t even been harvested.

These guys were a century ahead of the Rothschilds, if only they had gold instead of rice.  

If you are curious about what happened on the other side of the world, New York – the global financial hub today – had about 1,000 houses at the time, with a population of less than 10,000 people.

The Most Successful Trader

Back to Osaka.

There was a guy named Munehisa Honma (or Homma), nicknamed the god of the market.

Born in 1724, he was a rice merchant who traded on the Dōjima Rice Exchange.

He started to notice that the fluctuating price of rice had been mostly driven by traders’ emotions. (Familiar?!)

In 1755, he wrote the first book on market psychology. (I want a copy of this…)

Traders’ psychological aspect led to market cycles, he claimed – Yang (bullish) and Ying (bearish).

He even recommended trading against the market.

Buy the dip, sell the rip…

Honma’s research on market psychology led him to develop the first version of the candlestick chart, where each candle showed the price open, close, high, and low.

While he was drawing these bars (on rice paper – what else?), he noticed repetitive patterns and gave them names.

Some of them are so popular today, like Doji, Hanging Man, or Spinning Top.

Being the father of technical analysis, Honma was way ahead of everyone else.

It’s like he used cheat codes – his wealth increased on steroids. He was probably taking baths in rice.

He was so respected that he received the honorary title of Samurai and was an adviser to the Japanese government.

Japanese traders have been successfully using the candlestick chart for about 300 years, but they didn’t want to share this secret with the West, which had London, New York, and Chicago hosting the largest stock markets in the world.

Why would they?

Nevertheless, due to the intersection of financial markets, the Western world found out about candlesticks …but only in the 1980s!

As more Western analysts learned about these enigmatic charts, Steve Nison, a technical analyst at Merrill Lynch, published a book titled “Japanese Candlestick Charting Techniques,” popularizing the concept.

So this is how candlesticks went from rice storehouses to your screen.

Say a big thank you to Steve…