Technical Analysis is the discipline that studies and graphically records the price and volume changes of a stock or asset, with the aim of exploiting recurring patterns and phenomena with predictive characteristics.
The origins of Technical Analysis date back to 17th-century Japan, in the rice futures markets of Osaka. After a century of internal wars among the daimyo—Japanese feudal lords—General Tokugawa emerged victorious at the Battle of Sekigahara (1600), initiating the unification of Japan. To maintain the loyalty of his subjects, Tokugawa, appointed Shogun, consolidated his power and ensured the allegiance of his followers by concentrating the political-military elite and their families in Edo (modern-day Tokyo).
At that time, the primary source of income for the daimyo was rice collected from the peasants working their lands. Since transporting rice to Edo was impractical, it was stored in the port of Osaka. The proximity of the daimyo in Edo sparked a competition for prestige, manifested through luxuries and other excesses. To sustain this lifestyle, the daimyo sold stored rice and even future harvests. For this “future rice,” warehouses began issuing contracts known as “empty rice.” These contracts were traded in a secondary market, giving rise to one of the world’s first futures markets.
The most prominent trader in this market was Munehisa Homma, who operated in the early 18th century. For Homma, markets were heavily influenced by the psychology of investors, who sometimes perceived a harvest differently from reality. In his book, *The Fountain of Gold*, he expressed ideas that remain highly relevant today, particularly what many Western traders know as contrarian opinion:
“When the price of rice begins to rise, orders come in from all directions at once, and soon the Osaka market joins the frenzy. The price of rice rises faster when people place orders even for stored rice, and it becomes clear that a buying fever is underway. But when you want to be in the position of placing buy orders like everyone else, it’s important to be on the side of those placing sell orders. When people move in unison, rushing westward with the determined intention of participating in the rise, that’s the moment for you to head east, and you will discover great opportunities.”
Steve Nison, an investor who popularized the use of Japanese candlesticks in the West, states in his book *Beyond Candlesticks*:
“In the material I translated, candlestick charts are often called Sakata charts, in reference to the port city of Sakata, where Homma lived. However, based on my research, it is unlikely that Homma used candlestick charts. It is more likely that these charts were developed in the early part of the Meiji period in Japan (late 1800s).”
It is worth noting that, although Homma may not have used candlestick charts, this type of graphical representation was the evolution of centuries of experience using price records for predictive purposes.
The Revolution of Japanese Candlestick Charts
The graphical representation of prices has been a determining factor in the evolution of technical analysis, marking a clear distinction between investment approaches in the East and the West. While traditional bar charts, predominant in the West, were limited to showing opening and closing prices, Japanese candlestick charts offered a more comprehensive view of investor psychology. These charts incorporated not only the opening and closing prices but also the highs and lows of each session, represented intuitively through the body and wicks of the candles.
Perhaps Western investors, constrained by the simplicity of bar charts, developed an approach more focused on studying price formations, while the Japanese could make decisions based on the analysis of small groups of candles. Over time, however, both approaches proved equally practical, and a multi-timeframe understanding became part of the operations of both Western and Japanese investors.
An example of the application of a multi-timeframe approach in the West is found in the father of modern technical analysis, Richard W. Schabacker, who, despite his short life, left a prolific body of work. In his book *Technical Analysis and Stock Market Profits* (1932), he classifies markets into major movements (monthly), intermediate movements (weekly), and minor movements (daily). In Japan, Goichi Hosoda, the creator of the Ichimoku Kinko Hyo indicator, is the best example of an investor who dedicated his life to cataloging and studying price formations beyond the use of candlestick patterns.
Over time, modern Western investment platforms adopted the innovations of Japanese candlestick charts, integrating the ability to display highs, lows, openings, and closings in a single format.
In the early 20th century, scholars of charts in the West were known as chartists, but today, “Chartism” is associated with a classical methodology popularized by journalist and investor Richard W. Schabacker (1899–1935) and later by the book *Technical Analysis of Stock Trends* (1948) by authors Robert D. Edwards and John Magee.
Theory on the Emergence of Technical Analysis
Since the dawn of humanity, people have sought to represent the phenomena around them to understand or communicate information. Whether through cave drawings, symbols, or written records, visual representation has been a fundamental tool for making sense of the world. Undoubtedly, price fluctuations were a phenomenon that invited analysis.
The earliest investors, using graphical representations, aimed to find order in chaos. By meticulously recording price movements, these pioneers likely discovered something surprising: repetitive patterns that seemed to predict future behavior. This discovery must have been thrilling, as it offered the promise of significant profits, often with seemingly low risk.
Without needing to understand market psychology, as later technical analysts would, these early investors found a practical advantage in these patterns. When enough of them identified and acted on the same pattern, it tended to fulfill itself more frequently, reinforcing its validity. Thus, what began as an intuitive observation evolved into a structured practice, laying the foundation for what we now know as Technical Analysis: a discipline that thousands of investors use to interpret market behavior and make informed decisions.
Fun Fact
The first work to describe the phenomenon of stock market investing is titled *Confusion of Confusions* (1688) by José de la Vega, set in Amsterdam, the financial hub of Europe at the time. More than a detailed study of the investment methods of the era, this novel seeks to entertain and inform readers about the risks of speculation.
Its author, moreover, employs a narrative style that surpasses even the florid prose of his contemporaries:
“They strive to perpetuate the unrest of those who frequent their dealings, and just as they imprison them in their towers, they cast the locks into the sea so that the hope of ever removing the bolts may never flatter them.”
Conclusions
Some might consider the history of technical analysis a curious but irrelevant tale for modern practice. However, history shows us that markets are more than just numbers—they are a reflection of human psychology. Far from being a mere catalog of tricks to memorize, technical analysis invites us to understand psychological dynamics to make informed decisions.
Recognizing that markets are shaped by historical patterns grants us a strategic advantage. By studying how past investors interpreted prices and emotions—from rice traders in 17th-century Japan to modern analysts—we can anticipate market movements with greater precision. This perspective not only enriches our trading but also positions us as more aware and prepared investors in an environment where collective psychology remains the dominant force.
References
Nison, S. (1994). *Beyond Candlesticks: New Japanese Charting Techniques Revealed*. New York, NY: John Wiley & Sons.
Schabacker, R. W. (1932). *Technical Analysis and Stock Market Profits*. New York, NY: B.C. Forbes Publishing.
Edwards, R. D., & Magee, J. (1948). *Technical Analysis of Stock Trends*. Springfield, MA: John Magee.
Rabassa, Y. (n.d.). *How to Master Japanese Candlesticks?* [Video]. YouTube.
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Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.