Japanese candles, as their name indicates, have their origin in Japan in the first decade of the 17th century. The Japanese were the first to use technical analysis to operate in the rice futures markets, this market was created as a consequence of the country’s own military history.
General Tokugawa Leyasu won the battle of Sekigahara in 1600 which helped to unify Japan from the constant battles between the different daimyo (feudal lords), Tokugawa asked all the feudal lords who wanted to live in Edo (present-day Tokyo).
Once all the “clusters” in Tokyo competed with each other by displaying wealth in houses, mansions, and other luxuries, they were basically high-standard spendthrifts.
The income of the feudal lords came from the collection of rice as a tax on the farmers who worked the land. By leading this very high standard of living, they sometimes sold rice from future crops, thus creating the world’s first futures market, they were called empty rice contracts because the rice did not physically belong to anyone and was sold on the secondary market.
The rice futures market generated a lot of speculation and the Japanese technical analysis was born as a result. One of the most famous traders was Homma, he discovered that there was a relationship between supply and demand and that it greatly influenced the emotions of the traders, basically he discovered that you had to differentiate between the value and the price of rice.
As we can see there are feelings and attitudes that have been present in the human being for many years, applied to the markets, we see how greed and fear have been present and it continues to affect the price.
Learn more about Japanese candlesticks in trading:
What is a Japanese candle and how is it formed?
A Japanese candle is the graphical representation of the price of an asset in a certain time frame. A Japanese candle tells us 4 things: opening price, highs, lows and closing price.
If we have a 1 hour time frame, each candle represents the movement or variation of the price during those 1 hour.
The candle is green if the closing price is above the opening price. On the other hand, a candle is red if the closing price is below the opening price.
The body of the candle tells us how much the price has changed in that time period. The lower and upper wicks mean that the price was moving at that price, but fell back. These wicks are also known as ceiling tails or floor tails.
What do Japanese candles represent?
Japanese candlesticks represent, in addition to the price movement, the feeling that there was in that period of time. The feelings are: greed when we see a rise in prices with large green candles, fear when we see a fall in prices with large red candles, and uncertainty when we see small candles or compressed candles.
Japanese candlestick reading along with its price context is much more powerful for making entry or exit decisions. It is also important to understand that every Japanese candle indicates a fight between buyers and sellers, and you will see these feelings reflected on every occasion.
When a large consecutive green candles start to form indicating euphoria, people will want to join the game, but it is not a good idea to be part of the mass that is moving by emotion and greed. It is better to be a patient trader who waits for the ideal moment to buy.