Munehisa Homma

Munehisa Homma (also known as Sokyu Homma), the legendary “God of the markets,” was an 18th-century Japanese rice trader from Sakata, Japan. He is widely credited as the father of the candlestick chart, one of the most popular and powerful tools in modern technical analysis. Operating in the Dojima Rice Exchange in Osaka, Homma amassed a fortune by developing a revolutionary method to track and predict market price movements. He understood that while the rice market was influenced by supply and demand, it was ultimately driven by the emotions of its participants. By meticulously recording the open, high,low, and close prices for each day, he created visual patterns that revealed the underlying market psychology. His insights, compiled in books like “The Fountain of Gold – The Three-Ape Record of Money,” laid the groundwork for a trading philosophy that has transcended centuries and asset classes, proving invaluable even to today's investors.

Imagine Japan in the 1700s. The Samurai are the ruling class, and rice is the foundation of the entire economy—it's not just food, it's wealth itself. In this world, Munehisa Homma became an investing titan. After inheriting his family's business, he didn't just trade rice; he mastered the rice market. He created a sophisticated personal information network, with men on rooftops using signal flags to communicate prices from the local Sakata exchange all the way to the central market in Osaka, hundreds of kilometers away. This informational edge was powerful, but his true genius was in interpreting the price action itself. He realized that the market had a personality, a rhythm driven by human fear and greed. He dedicated himself to understanding this rhythm, and in doing so, he developed a visual language to decode it.

Homma's method was to give price a visual form, which we now call a candlestick. Instead of just looking at a closing price, he wanted to see the entire story of the trading day in a single glance.

Each candlestick is a simple, elegant summary of a trading period (e.g., a day) and represents four key pieces of information:

• The opening price
• The highest price
• The lowest price
• The closing price

These are displayed in a unique shape:

• The Body: The thick part of the candlestick represents the range between the open and close price. If the close is higher than the open, the body is typically green or white (a good day for buyers). If the close is lower than the open, it's red or black (a good day for sellers).
• The Shadows (or Wicks): These are the thin lines extending above and below the body. They show the highest and lowest prices reached during the period, representing the extremes of the battle between buyers and sellers.

For Homma, and for traders today, candlesticks are more than just data points; they are windows into market psychology. This is a core idea in behavioral finance. A long upper shadow, for instance, tells a story: buyers tried to push the price way up, but sellers overwhelmed them, pushing the price back down by the close. This could signal that buying momentum is fading. A long green body with tiny shadows suggests that buyers were in complete control from start to finish. By combining these individual “stories” into patterns, Homma could anticipate shifts in market sentiment with uncanny accuracy.

While Homma was a trader, not a buy-and-hold investor, his core principles are timeless and offer profound wisdom for anyone practicing value investing.

Homma's writings suggest a deeply contrarian approach. He wrote about buying when the market is in a state of yin (bearishness and despair) and selling when it reaches a state of yang (bullishness and euphoria). This is the 18th-century Japanese equivalent of Warren Buffett's famous advice to be “fearful when others are greedy, and greedy when others are fearful.” Homma knew that the greatest opportunities are found by moving against the herd.

Homma didn't trade on whims. He developed a system of reliable patterns to signal market reversals or continuations. These methods, known as the Sakata Five, are the ancestors of many patterns used today. They included patterns with evocative names like “Three Mountains” (a precursor to the modern Head and Shoulders pattern), “Three Rivers,” and “Three Soldiers.” This highlights the importance of having a systematic, evidence-based framework for making investment decisions rather than relying on emotion.

Homma taught that an investor should be like a patient hunter, waiting calmly for the perfect setup. He would often wait for days or weeks for one of his key patterns to emerge before making a move. For a value investor, this translates perfectly to the discipline of waiting for Mr. Market to offer a wonderful business at a fair price, rather than constantly chasing mediocre opportunities.

Munehisa Homma's legacy is immense. Every time you see a green and red chart on a financial news network, you are seeing his invention at work. For value investors who focus on a company's fundamental strength, candlestick analysis might seem like a foreign tool. However, it can be a fantastic supplement. Once your fundamental research has identified a great company that is undervalued, candlestick charts can help you better time your entry point, perhaps after a wave of panic selling has clearly exhausted itself. Likewise, they can provide early warnings that the market for one of your holdings is becoming irrationally exuberant, giving you a signal to consider taking profits. Homma gave us a language to understand market emotion, a skill that perfectly complements the logical rigor of value investing.