Originally developed for predicting and projecting future rice prices, Japanese Candlesticks have been used by traders in all types of equities, commodities and financial markets for centuries. The exact point and time this tool was developed remains a mystery but it has become one of the most used technical trading tools available for use today. They have proven to be reliable over time and that is why they are still used today. After centuries of refinement candlestick trading has become a science that can be used to make you a more profitable trader.
Forex traders often refuse to take time to learn the history of the tactics and technical tools that they use on a daily basis. This leads them to not understanding the limitations of the tools and how to best utilize the limitations of the tool in an effort to profit. The quote begins “If we fail to learn from history,” says a lot about learning the background of the tools that can make us the most money. Often traders refuse to look at what makes a tool work and today we will see the history of the candlesticks that make them work.
Japanese rice merchant Munehisa Homma started to plot the price of rice in the 18th century. At the time the markets were ruled by fear, greed and a herd mentality (much like there are today). However, he found a way that by tracking the price at certain points he was able to see patterns that developed during the day that provided him information on how the market would react the next day. He tracked the opening price, closing price as well as the high and low prices of the day and when it was drawn on a chart had the appearance of a candle, thus the name candlesticks. Over time his patterns proved so profitable that he is said to have amassed a fortune greater than $10 billion dollars in today’s money.
A single event does not make a pattern, but seeing the same price action occurring after seeing a particular formation occur frequently does make a pattern and patterns can be counted on to repeat in the same fashion as they have in the past. Candlestick patterns have proven to be profitable and in an effort to develop a visual way of marking these profitable patterns Muneisha began to label the patterns so that they could be used over and again by himself and his traders. The names he chose to use came from basic military formations of the time.
In conclusion, candlestick patterns can be very effective and useful in Forex trading and be used to deduce more Forex trading profits. Some candlestick patterns can be more profitable than others and some are seen more often than others. As with all trading systems and education, you must learn to use the information by observation and practice in the real world. Patterns do not always follow the exact line each time but they do provide us with a starting point from which to base our trading style.