Japanese Candlestick Patterns: History and Psychology

Long before the NYSE or Nasdaq existed, traders in 18th-century Japan were using candlesticks to track price action — not of stocks, but rice. Meet Homma Munehisa, a wealthy rice merchant from Sakata. He’s credited with creating what we now call Japanese candlestick patterns.

The Origin of Japanese Candlestick Patterns — A Revolution in Trading

Homma traded at the Dōjima Rice Exchange, considered the world’s first futures market. But he didn’t just watch prices. He watched people.

He observed that markets moved on emotion — not just supply and demand. And he built a system to track that emotion with candlestick charts.

But Homma went further. He developed a set of trading rules called the Sakata’s Methods — a strategy toolkit designed to anticipate market moves based on recurring price patterns.

These principles became known as Sanmi no Den, or “Sakata’s Constitution”. They focused on:

• The psychology behind market swings
• The relationship between price and time
• The power of repetition in candlestick patterns

📜 Think of it as the original trading playbook — centuries before chart patterns became mainstream.

These early Japanese trading methods didn’t just log prices — they reflected how people felt at each turning point in the market.

🧠 Fun fact: Homma reportedly made over 100 consecutive profitable trades. His system became the foundation of modern candlestick analysis.

Homma’s insights weren’t just smart — they were revolutionary. He turned market behavior into a visual language, and that language still speaks to traders today.

For a deeper dive, check out Japanese Candlestick Charting Techniques by Steve Nison.

Candlestick Psychology — Emotions in Every Candle

Candlestick patterns don’t just show price. They reveal fear, greed, hesitation, and conviction.

Each Candle = A Psychological Battle

Each candle is a snapshot of the bulls vs. bears tug-of-war.

When you see:

• A Doji → the crowd is uncertain.
• A Hammer → bears tried, buyers pushed back.
• A Bullish Engulfing → buyers took over with force.

You’re not just reading a chart. You’re reading emotion.

Behavioral finance confirms this — we are emotional investors, not logical machines.

Ancient Japanese Trading Methods — Still Relevant Today

Japanese candlestick patterns were built on Eastern philosophy — balance, observation, and flow. Traders believed the market behaved like nature. It moved in cycles.

Homma described the market as a “mental war,” where mastering patience and self-control was key.

Instead of predicting the future, Japanese traders observed the present:

• Reversal patterns? That’s the tide shifting.
• Continuation patterns? That’s the wind still blowing in one direction.
• Indecision? Calm before the storm.

This concept of emotional wave-following still guides traders today — even in fast-moving markets.

Why Japanese Candlestick Patterns Still Work Today

Technology has changed. Psychology hasn’t. We still:

• Panic
• Chase
• Follow the crowd

Candlestick Patterns + Modern Data = Consistency

Modern tools confirm what Homma discovered centuries ago:

• Machine learning shows some candlestick patterns still offer 70–80% win rates in ideal conditions.
• TradingView, ThinkOrSwim, and automated bots still detect Morning Stars, Engulfings, Dojis, and more
• Patterns appear across markets — stocks, crypto, forex, commodities — and across all timeframes

Because while assets evolve, trader emotion does not.

The Universal Language of Candlestick Psychology

Candlestick patterns are global. Visual. Emotional.

They work because:

• They show what people are doing
• They suggest what people might do next
• They help you trade with — not against — the crowd

Japanese candlestick psychology gives traders one major edge: real-time emotional insight. Not guesses. Not forecasts. Just clarity.

Real Market Example — Candlestick Psychology in Action

Let’s say you spot this 3-candle setup:

1. Long red candle – selling panic
2. Doji – hesitation and exhaustion
3. Long green candle – buyers take control

This is a Morning Star — a bullish reversal pattern.

But more than that, it’s a perfect story arc:

• Bears won early (fear)
• The market paused (indecision)
• Bulls returned (optimism)

That’s classic candlestick psychology at work.

FAQs — Japanese Candlestick Patterns

Q: Who invented candlestick patterns?
A: Homma Munehisa, a Japanese rice trader from the 1700s. He pioneered emotion-based charting methods.

Q: Why do these patterns still work?
A: Because human psychology hasn’t changed. Fear, greed, and hope still move markets.

Q: Where can I apply Japanese candlestick patterns?
A: Stocks, crypto, forex, commodities — anywhere there’s a chart with open, high, low, and close.

Q: What’s the main idea behind candlestick psychology?
A: Every candle represents a shift in crowd emotion. Learn the patterns, and you learn the crowd.

🏯 The 5 Laws of Sakata’s Constitution (Sanmi no Den)

Also known as Sanmi no Den, these timeless rules are the foundation of Japanese candlestick patterns. Each one reflects a repeatable setup, a market behavior, and a tactical response.

1. The Three Mountains (San-Zan)

Pattern: Triple Top
Signal: Market is likely topping out
Action: Look for bearish confirmation → Prepare to sell or short

🧠 Psychology: Bulls try three times to break out, but momentum fades.

2. The Three Rivers (San-Sen)

Pattern: Triple Bottom
Signal: Market is forming a base
Action: Wait for bullish pattern (e.g. Hammer or Bullish Engulfing) → Prepare to buy

🧠 Psychology: Bears exhaust themselves after three failed pushes lower.

3. The Three Gaps (San-Puku or San-Kumo)

Pattern: Three Rising Windows (or Three Falling Windows)
Signal: Trend is strong but overextended
Action: Anticipate reversal or pullback after third gap

🧠 Psychology: Everyone is chasing. Time for smart money to fade the crowd.

4. The Three Soldiers (San-Pei)

Pattern: Three White Soldiers or Three Black Crows
Signal: Strong reversal in progress
Action: Join the new trend → Buy after Three White Soldiers, Sell after Three Black Crows

🧠 Psychology: Steady, confident control by bulls or bears over three candles.

5. The Three Methods (San-Hō)

Pattern: Rising Three Methods / Falling Three Methods
Signal: Pause in trend, not a reversal
Action: Enter in the direction of the trend after the consolidation finishes

🧠 Psychology: Side taking a break, not losing control.

Apply Psychology to Your Trading Today

You’ve learned that Japanese candlestick patterns aren’t just visual tools — they’re windows into market emotion.

Now it’s time to put that knowledge into action.

🧠 Simple Activity: Spot the Psychology in One Chart

1. Open TradingView.com.
2. Type in any popular stock or crypto (e.g., TSLA).
3. Set your chart to the daily timeframe.
4. Look for a 3-candle formation (pan back in history or zoom out if you need to):
   • A strong red candle
   • A small candle (Doji or Spinning Top)
   • A strong green candle

Ask yourself:

• Who was in control at each candle?
• What emotions are being expressed?
• Does this resemble a Morning Star or another known pattern?

🎯 If you can describe the emotional story behind the candles, you’re already thinking like a pro.

Japanese candlestick patterns aren’t just part of trading history — they’re living tools, powered by human emotion.

By understanding their origins and mastering the psychology behind them, you’ll unlock a skillset that works across time, markets, and technology.

👉 Continue learning: Candlestick Patterns for Beginners (Starter Guide)