How You Can Profit From The History Of Candlestick Patterns

candlestick patterns

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Japanese candlestick patterns have been around for centuries. Originally they were used by merchants to help them predict and profit from rice trading. I guess you can say that they have really passed the test and are a “seasoned” tool for any financial market. If they weren’t somewhat reliable then they would have faded away many years ago – but they are more useful today than ever!

History is not a favorite past time for traders. Most traders don’t care what happened in the past, they only focus on where the market is going now. For me, I’m an avid student of the markets. I’ve read a lot of books about early trading in the 30’s and 40’s as well as some of the more “modern” theories of technical analysis and portfolio management. This quick history of Candlestick Patterns hopefully will help shed some light on how to really use them to profit.

18th Century Rice Trading

While there are accounts of candlesticks being used as far back as the 17th century, the first detailed documentation of candlestick patterns can be traced back to an 18th century Japanese businessman named Munehisa Homma. Munehisa used candlesticks to chart and track rice contracts.

Everyone at the time was tracking rice contracts, but what he did was take an emotional approach to the market – analyzing fear, greed, and the herd mentality. He found a way to accurately observe the behavior of the masses and manipulate them to his advantage.

He tracked the opening and closing price along with the high and low of the day and placed them on a chart. This graphic representation was a series of columns that looked like candlesticks, hence the name.

He took an extremely chaotic market and brought some order and insight to why prices did what they did. The patterns that repeated themselves over and over again became his bedrock for future price moves. Homma made huge contributions to early candlestick charting.

There are some reports and sources that say he would consistently make dozens of profitable trades. I wish I had that sort of success with SLV last month. Rumors are that he gained the equivalent of over $10 billion in today’s dollars. He could have very well been the most successful trader in all of history…

Where Did The Crazy Names Come From?

Remember, we are still in 18th century Japan here. Munehisa needed a way to link the chart patterns to some visual concept – the tug of war between buyers and sellers in the market. With this, he labeled the names of specific candlestick patterns from mostly military concepts.

Today some of these patterns have kept their Japanese names such as the Doji Star, Harami, and Tasuki. Others have been translated into an English equivalent like the Abandoned Baby or Hanging Man. Either way, the patterns are still the same today as they were back then and just as powerful for your trading.

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How To Easily Find Patterns

If you are just starting out it may be hard to find reliable patterns right? Well now most brokers have a tool that lets you scan for particular candlestick patterns instantly and accurately. Pretty damn cool I know…

[youtube]http://www.youtube.com/watch?v=fwVhTlib0Mc[/youtube]

Now you should have a basic understanding of how to find advanced candlestick patterns and use them to profit. The patterns and strategies I talked about above are only a few of the many candlestick patterns that can help you become a more reliable and consistent trader.

Mr. Candlestick – Steve Nison

As always, give credit where credit is due…

In 1989, Steve Nison published an article in Futures Magazine that first introduced the western world to candlestick patterns. He is still very active and remains one of the foremost experts on candlestick patterns. Since the growth of candlestick patterns has really taken off since 2000 with more and more investors trading online.

If you are into day trading or swing trading these days then you must know two things, technical analysis and candlestick patterns. Both of these tools are a must if you want to become a winning trader no matter what market you like to trade or what contracts or instruments you want to trade.

To tell you truth, in the beginning, you might get overwhelmed by the number of technical indicators that are available. What you need to do is to choose only two or three and then master them. One should be a trending indicator and the other should be a ranging indicator. I think, mastering three indicators is the best for you. Don’t go for more than three indicators.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.