The Five Sakata Methods – Strategies and Rules

Before Homma developed candlestick charts , traders in his hometown of Sakata, Japan followed a set of rules and methods known as the Sakata Constitution.
Homma later used a set of patterns in this constitution, which are known as the Five Sakata Methods and which are the basis of his market analysis principles regarding candlestick charts. Today, these patterns still allow traders to identify trends in the market.

Sakata Constitution

It consists of a set of simple rules to operate in the market and by means of which the operator can know his mistakes and try to correct them. These rules are as follows:

Study the time and price in the past but don't be greedy.
Try to buy at the bottoms (minimum points) and sell at the tops (maximum points).
Increase your position size when the price rises 100 pips from the low or falls 100 pips from the low. In other words, add to your position trades where the market goes our way depending on the value of the price change.
If we open a position and the market moves against us, we must close the operation immediately and try to identify the possible error as soon as possible. Likewise, we must rest and stay out of the market for 40 to 50 days.
If a position is making a profit, liquidate 70 to 80 percent of the position to lock in profits. Liquidate the rest when there is a change in the price trend.
Sakata's 5 patterns

The five Sakata methods consist of 5 specific patterns:

Three mountains.
Three rivers.
Three holes.
Three parallel lines.
Three methods.

What is the meaning of three? The Japanese culture of that time believed that the number three was significant, even divine. Homma also believed that when traders find a promising transaction, they should wait for three days. If the trade still looks good after that period, then it is most likely profitable.
For some probably the description of these patterns is familiar. However, these candlestick formations can be quite useful in predicting market trends.

Pattern of the three mountains

This pattern shows three candlesticks moving up or down in a trend. Usually, this formation indicates that the trend is about to end. If the middle candlestick is higher than the other two, the formation becomes a three Buddha pattern which we also know as a Head-Shoulder-Shoulder. When this formation is observed, the trader must prepare for a possible change in trend.

Pattern of the three rivers

This pattern also indicates a possible change in trend. This formation can look different depending on whether the trend change is bullish or bearish.
The bearish version of this pattern, called the Three River Evening Star , shows a long bullish candlestick, a short bullish candlestick (also known as an island or star), and a bearish candlestick in which the low is below the midpoint of the body. of the candle of the first day.
The bullish version, called three rivers morning star, shows a long bearish candlestick, a short bearish candlestick and a bullish candlestick in which the low is below the midpoint of the first day's candlestick body.

Three-hole pattern

This formation usually appears when the market is about to change its trend. A gap occurs when the opening prices move significantly up or down from the close of the last candle which creates an empty spot on the chart. The three gaps pattern usually means that a trend has ended and is about to change. After the third gap in this pattern appears and the price reverses its trend, the market moves enough to close the entire length of the second gap.

Pattern of the three parallel candles

It is a pattern that is made up of three candles that go in the same direction and that have a similar length. This means that the prevailing market trend has a high chance of continuing and the trader must trade according to this condition. When the three candlesticks are bullish, the formation is known as a three soldiers , but when the formation is bearish it is called a three crows.

Pattern of the three methods

It is a formation that indicates the ability of the market to continue with a bullish or bearish trend. In this case, the trader can consider that the trend is reinforced when a large candlestick is formed (bullish or bearish depending on the trend), which is followed by three candlesticks with a shorter length and in the opposite direction and finally by a large candlestick whose close must be higher (bullish pattern) or lower (bearish pattern) than that of the first candle.

Summary

For many, trading based on Japanese candlestick patterns can be difficult to learn given the large number of existing formations.
However, over time the trader becomes familiar with these patterns and learns to visualize them quickly. You will also gradually learn other pattern formations and combinations that you can use to determine the state of the market, anticipate its possible direction, and identify good trading opportunities.
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