FEBRUARY 15 2022 / SUZANNE NOUKAHOUA
he Candlestick psychology of price action monitoring was developed by Munehisa Homma of Sakata Japan to monitor the prices of rice. It is widely used today in stock indexes and though each candlestick in its very simple form tells us the high and low price of a session with the wicks, and the open and closing price of the session with the body, the art was meant to create a visual story of the wider market psychology.
My book The Doji’s Rumble introduces us to this special price monitoring system or ‘rice code’, which Homma used to decipher price action for the coming day or time of day based on what the market opening prices revealed about the mindset of other traders.
Homma learned a lot about what would likely happen with the price of rice (futures contracts as we call them now) based on how traders acted during the morning period when rice inventories had been rumored to be flush or seasons where drought or unseasonably early rains damaged the rice harvest. He’d watch as wealthier traders didn’t want to appear desperate would wait until the end of the day to buy, in hopes that denying sellers their large demand would drive the price of rice down. However, if a moderate or wealthy buyer would enter the market early it would set off a domino effect of rising rice prices.
Often times when new students of trade begin trading they take a lot of time to learn to manage their own personal psychology. However, with Homma’s method of showing increasing and decreasing price action with the candlestick’s wicks to demonstrate the overall movement of the price he was actually aiming to better understand the psychology of the other buyers and sellers. His framework was that one could control one’s own mind best by being equipped with the tools to understand what other traders were likely to do in any given circumstance.
The Options Trading Journey
This is why The Doji’s Rumble, the first book in The Candlestick Journey is such an important gift for the young mind because it equips them to begin to study others first before becoming too steadfast in a market bias, trade reaction, or trade decision.
Homma became an iconic futures trader because his entire practice was creating rules on how to respond to the interactions between buyers and sellers. Often, new students spend so much time worrying about themselves they are left utterly confused by how or why the market railroaded them. But, the market is too big to care about individual investors and the investor’s individual psychology. It is actually the interactive social psychology of all traders, that is where the gold mine lies with becoming a more fruitful or profitable trader.
Find out more about the book and discovering candlestick patterns at candlestickjourney.com