Japanese technical analysis: Everything you should know about

This article provides the framework through which Japanese technical analysis evolved. For those who are in a rush to get to the “meat” of the book (that is. the techniques and uses of candlesticks). you can skip this chapter. or return to it after you have completed the rest of the book. It is an intriguing history.

Among the first and the most famous people in Japan to use past prices to predict future price movements was the legendary Munehisa Homma. He amassed a huge fortune trading in the rice market during the 1700s. Before I discuss Homma. I want to provide an overview of the economic backaround in which Homma was able to tiourish. The time span of this overview is from the late 500s to the mid- 1 700s. During this era Japan vent from 60 provinces to a unified country where commerce blossomed.

From 1500 to 1600. Japan was a country incessantly at war as each of the daimio (literally “big name” mealling “a feudal lord”) sought to wrestle control of neighboring territories. This 100-year span between 1500 and 1600 is referred to as “Sengoku Jidai” or. literally. “Age of Country at War.” It was a time of disorder. By the early 1600s, three extra ordinary generals — Nobunaga 0 da. Hideyoslii Toyotomi. a mid Ieyasu Tokugawa —had unified Japan over a 40-year period. Their prowess and achievements are celebrated in Japanese history and folklore. 

There is a Japanese saying: “Nobunaga piled the rice. Hideyoshi kneaded the dough. and Tokugawa ate the cake.” In oilier words. all three generals contributed to Japan’s unification but Tokugawa. the last of these great generals. became the shogun whose family nileci Japan from 1615 to 1867. This era is refeneci to as the Tokugawa Shogunate.

The military conditions that suffused Japan for centuries became an integral prt of candlestick tenninology. And. if you think about it. tradi ng requires many of the same skills needed to win a battle. Such skills include strategy. psychology, competition. strategic withdrawals. a iid yes. even luck. So it is not surpnsmg that throughout this book you will conic across candlestick terms that are based on battlefield analogies. There are “night aiid morning attacks”, the “advancing three soldiers pattern”. “counter attack lines”, the “gravestone”. aiid so on. 

The relative stability engendered by the centralised Japanese feudal system lead by Tokugawa offered new opportunities. The agrarian economy grew. but, more importantly there was expansion and ease in domestic trade. By the 17th century a national market had evolved to replace the system of local and isolated markets. This concept of a centralised marketplace was to indirectly lead to the development of technical analysis in Japan.

 Hideyoshi Toyotomi regarded Osaka as Japan’s capital and encouraged its growth as a commercial centre. Osaka’s easy access to the sea, at a time where land travel was slow, dangerous. and costly. macic it a national depot for assembling and disbursing supplies. It evolved into Japan’s greatest city ‘ commerce and finance. Its wealth and vast storeh ouses ct’ supplies provided Osaka with the appellation the “Kitchen cf Japan.” Osaka contributed much to price stability by smoothing out regional differences in supply. In Osaka. life was permeated by the desire for profit (as opposed to other cities in which money making was despised). The social system at that time was composed cf four classes. In descending order they were the Soldier. the Farmer. the Artisan. and the Merchant. It took until the 1700s for merchants to break down the social banier. Even today the traditional greeting in Osaka is ‘1Mokari- makka” which means. “are you making a profit’?”. 

In Osaka. Yociova Keian became a war merchant for Hideyoshi (one the three great military unifiers). Yodoya had extraordinary abilities in transporting, distributing, and setting the pice cf rice. Yodoya’s front yard became so important that the first rice exchange developed there. He became very wealthy—as it turned out. too wealthy. In 1705. the Bakufu (the military government led by the Shogun) confiscated his entire fortune on the charge that lie was living in luxury not befitting his social rank. The Bakiiñi was apprehensive about the increasing amount c( power acquired by certain merchants. In 1642 certain officials and merchants tried to corner the iice market. The punishment was severe: their children were executed. the merchants were exiled. and their wealth was confiscated.