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In the early 1700s, a wealthy Japanese rice merchant, Munehisa Homma, developed a system of tracking and analyzing rice futures, which over time matured into the high profit candlestick patterns we know today. Homma is credited for creating or developing these specialized Japanese candlestick trading signals during the early history of the futures market.
Until about 1710, actual rice was traded from hand to hand. The futures market was developed with the idea that traders gave coupons or a promise to deliver rice at some future date. This quickly emerged as a very lucrative form of business so the futures market was born.
Homma’s business sense and ability to read the candle chart was unparalleled in his time. His ability to analyze the rice futures using what is now called Japanese candlestick charting techniques revolutionized trading and as such made him possibly the wealthiest trader in market history.
Terms like Dark Cloud Cover, Doji Candlestick, Shooting Star, and Hanging Man Candlestick are bantered about in trading circles probably with little thought for their humble beginnings in the rice trade and the infant futures market. What we are left with is a powerful collection of trading signals when we learn how to read candlestick charts for trading the futures, stock or Forex market.
The techniques that Homma began using 300 years ago can still be effectively used in today’s online trading environment as part of a complete technical analysis trading plan.
Here are some basic terms and concepts of the candlestick patterns:
A candle represents the high, low, open and close of a commodity, stock or currency for a certain period of time. Stocks, commodities and currencies can be traded in almost endless time frames such as 1, 5, 15 minute, 1 hour, 1 day, and 1 week time periods. For example on a one minute chart, one candle equates to how much the price moves on the market in one minute.
A bull candle, which is indicating increasing price, shows the opening price at the bottom of the body of the candle and the close price at the top of the body. Any extensions (called shadows or the wick of the candle) show the high and low price for that period.
A bear candle shows the opposite of the bull or a decreasing price: the top of the body of the candle indicates the opening price for that period and the bottom of the body of the candle indicates the close, with the shadow indicating the high and low price for that period.
The bullish Japanese candlestick pattern is usually color-coded green (close above the open)
The bearish Japanese candlestick pattern is usually color-coded red (close below open).