Part II Chapter 9 — Sakata’s Five Methods

{fullwidth}

The Power of Japanese Candlestick Charts by Fred K. H. Tam

1. Core Concept & Theoretical Foundation

Primary objective of this chapter: To trace candlestick analysis back to its classical philosophical root — Sakata’s Five Methods — a set of trading rules and pattern-grouping methods originated by Munehisa Homma in the mid-18th century. This chapter completes the historical arc the book began in Chapter 1: Chapter 1 introduced Homma as the legendary founder; this chapter unpacks the actual trading philosophy and pattern taxonomy he (and generations of successors) left behind.

Historical context: “Sakata” refers to the port city in Dewa Province (modern-day Yamagata Prefecture, on the west coast of northern Honshu) where Homma traded rice futures on the local exchange in the 1700s — the techniques are named after the city, not a person. Homma’s secret methods were passed down through generations of Japanese traders and split into two branches:

Soba Sani No Den (“Sakata’s Constitution”) — Homma’s original trading principles, developed before candlestick charting had evolved.
Sakata’s Strategies — what emerged when Sakata’s Constitution was later fused with candlestick charting technique.

Foundational theory — Sakata’s Constitution (5 core trading rules): These are general trading discipline principles, not candlestick patterns:

Avoid greed; weigh time and price ratio based on recent price movement.
Attempt to sell at the top and buy at the bottom.
Increase position size after a sufficiently large move (100 “bags”) from a bottom or top.
If a forecast is wrong, identify the error quickly, liquidate, and stay out of the market for 40–50 days.
On profitable positions, liquidate 70–80% near a perceived top/bottom, then liquidate the remainder and reverse direction.
- Rules 4 and 5 are framed as risk-management/profit principles; Rules 1, 2, and 3 require a chart and are framed as chart-reading skills that improve with practice.

Deeper cultural/theoretical foundation — the “Method of Three”: The chapter roots the entire Five Methods system in a Japanese cultural principle: “To consult the market about the market” — meaning traders should study price action itself rather than news or macro events. This connects to the Three Level Fluctuations theory (from Seiki Shimizu’s The Japanese Chart of Charts): markets move in a natural zigzag rhythm of three up-legs followed by three down-legs. The number three itself was historically considered mystical in Japanese culture, which the author suggests is the origin of the “three-based” naming convention running through all Five Methods. The chapter explicitly notes this Three Level Fluctuations theory closely resembles Elliott Wave Theory (introduced in Chapter 7) — reinforcing the book’s East/West comparative approach.

Underlying market psychology: As with Chapter 4/5’s individual patterns, the Five Methods groupings exist to help a trader recognize recurring, high-probability price structures — the charting technique’s stated job is not to predict exact tops/bottoms in advance, but to help confirm a top or bottom once it has formed.

2. Key Terms & Definitions

Term	Definition
Sakata’s Constitution (Soba Sani No Den)	Homma’s original five trading principles, developed before candlestick charting existed.
Sakata’s Five Methods	The pattern-grouping system created by later fusing Sakata’s Constitution with candlestick technique; consists of five “San-” (three-based) categories: Sanzan, Sansen, Sanku, Sanpei, Sanpo.
Sanzan (Three Mountains)	Pattern group covering major, longer-timeframe topping and bottoming formations (Western equivalents: Head & Shoulders, Double Top/Bottom, Rounded Top/Bottom).
Sansen (Three Rivers)	Pattern group covering three-candle reversal formations that forewarn a complete price-direction reversal.
Sanku (Three Gaps)	Pattern group built from three individual price gaps occurring within a defined trend, signaling the trend has moved too far, too fast.
Sanpei (Three Parallel Lines)	Pattern group of three same-coloured candles with no gaps between them — generally continuation signals.
Sanpo (Three Methods)	Pattern group covering the Rising/Falling Three Methods continuation patterns (already detailed in Chapter 5). Sanpo translates as “to take a rest or cease fire in market action.”
Three Buddha Top	A Three Mountains variant where the middle “mountain” is higher than the two flanking it — the Japanese equivalent of the Western Head and Shoulders Top.
Inverted Three Buddha (Head and Shoulders Bottom)	The bullish mirror of the Three Buddha Top.
Dumpling Top	The Japanese name for a Rounded Top.
Fry Pan Bottom	The Japanese name for a Rounded Bottom / Saucer.
Three-River Morning Star / Evening Star	(Reintroduced from Ch. 4) The classic Three Rivers formations — bullish reversal (Morning) and bearish reversal (Evening).
Evening Southern Cross (Three-River Evening Doji-Star)	A named variant of the Three Rivers pattern.
Two Crows	A Three Rivers variation; visually distinct from Upside Gap Two Crows but reflecting the same reversal intention.
Unique Three-River Bottom	Another named variant within the Sansen (Three Rivers) group.
Sanku Fumiage	Japanese term for a Bullish Three Gaps formation — interpreted as a price ceiling; a signal to start selling.
Sanku Nage Owari / Sanku Tatakikomi	Japanese terms for a Bearish Three Gaps formation — a signal to start buying.
Three White Soldiers / Three Black Crows	(Reintroduced from Ch. 4) The classic Sanpei (Three Parallel Lines) formations — continuation patterns when three same-coloured candles appear with no gaps.
White Three-Line Advance Block (Sakizumari)	A bullish Three Parallel Lines variant signaling a bullish move that is losing strength and likely to reverse (echoes the “Advance Block” concept from Chapter 4).
White Three-Line Star in Deliberation (Akasansen Shianboshi)	A bearish variant indicating a rally is stalling and likely to reverse; often evolves into a Bearish Engulfing or Three-River Evening Star.
Bozu Three Wings	A bearish Three Parallel Lines variant: all three candles are Bozu/Marubozu type, with a gap between the first and second candle — represents strong bearish price action.
Simultaneous Three Wings	A bearish variant where each candle’s open equals the prior candle’s close exactly (no gap, but perfectly adjoining) — signals continued bearish price action.

3. Anatomy, Rules, & Construction Mechanics

1. Sanzan (Three Mountains) — longer-timeframe reversal group

Structure: Two mirrored sub-groups of three shapes each, corresponding to the Three Level Fluctuations theory.
Topping group: Three Buddha Top / Head and Shoulders Top (middle peak highest), Double Top, Rounded Top (Dumpling Top).
Bottoming group: Inverted Three Buddha / Head and Shoulders Bottom, Double Bottom, Rounded Bottom (Fry Pan Bottom).
Scope: Viewed from a broad perspective — identifies major trend reversals over a longer time frame, often as one piece of a larger structural puzzle.

2. Sansen (Three Rivers) — three-candle turning-point group

Construction logic: Three candles, where the pattern forms in either a Morning (bullish/bottom) or Evening (bearish/top) position. The middle candle is typically a very strong single-candle type (Doji, Bozu, or Marubozu) — the Doji specifically signals the market’s inability to continue its current trend, and the third candle then confirms the reversal.
Named variations: Upside Gap Two Crows, Evening Southern Cross (Three-River Evening Doji-Star), Two Crows, Unique Three-River Bottom — visually distinct shapes, but all sharing the same underlying reversal intention.
Common misconception flagged by the author: Some literature incorrectly equates the “Three Rivers” with Head and Shoulders Bottom / Double Bottom / Triple Bottom — the author explicitly states this is not correct (those belong to Sanzan, not Sansen).

3. Sanku (Three Gaps) — trend-exhaustion group

Construction: Three individual price gaps occurring during a defined trend — the gaps do not need to be consecutive; they can form across many separate trading days.
Interpretation: Signals the market has moved too far, too fast, and the current trend is nearing its end — directly correlated to the Three Level Fluctuations theory (the gaps forming during the three individual price advances/declines that theory describes).
Directional labels: Bullish Three Gaps (Sanku Fumiage) = sell signal (price ceiling reached); Bearish Three Gaps (Sanku Nage Owari/Sanku Tatakikomi) = buy signal.

4. Sanpei (Three Parallel Lines) — continuation group

Classic construction: Three same-coloured candles with no price gaps between them. All white = Three White Soldiers; all black = Three Black Crows. These classic forms are read as continuation patterns.
Bullish variant — White Three-Line Advance Block (Sakizumari): Differs slightly from Three White Soldiers; represents a bullish move that is diminishing in strength.
Bearish variant 1 — Bozu Three Wings: All three candles are Bozu/Marubozu type, with a gap specifically between candle 1 and candle 2.
Bearish variant 2 — Simultaneous Three Wings: Each new candle’s open price equals the exact prior candle’s close price (perfectly adjoining candles, no gap) — a sign of continued bearish pressure.

5. Sanpo (Three Methods) — consolidation/rest group

Construction: Covers the Rising Three Methods and Falling Three Methods patterns already detailed structurally in Chapter 5 (5-candle continuation patterns with a 3-candle counter-trend pause).
Interpretation: Represents a resting/congestion period within the market — the name Sanpo literally means “to take a rest or cease fire in market action.”
Western equivalents: Bullish Flag (Rising Three Methods) and Bearish Flag (Falling Three Methods).

4. Practical Trading Application

Sanzan (Three Mountains) — application: Because these patterns operate on a longer time frame and larger scale, the trader’s task is to recognize them as part of a bigger structural picture rather than trade them in isolation — “piece together the puzzle” before predicting the outcome.

Sansen (Three Rivers) — application: Because the middle candle in these formations is typically one of the strongest single-candle types (Doji, Bozu, Marubozu), a trader should treat that middle candle as the clearest warning sign that the current trend is losing the ability to continue, and wait for the third candle to actually confirm the reversal before acting — consistent with the confirmation discipline established throughout Chapters 4 and 5.

Sanku (Three Gaps) — direct entry rule:

Bullish Three Gaps (Sanku Fumiage): treat as a price ceiling — start selling.
Bearish Three Gaps (Sanku Nage Owari/Sanku Tatakikomi): treat as a price floor — start buying. This is one of the more direct, unambiguous action rules in the chapter (a rare case of the book giving a straightforward “do this” without layered confirmation language).

Sanpei (Three Parallel Lines) — application: Because the classic Three White Soldiers/Three Black Crows are continuation signals, a trader should default to trading with the existing trend on these formations — but must watch specifically for the bearish variants (Advance Block, Deliberation-style Three-Line Star, Bozu Three Wings, Simultaneous Three Wings), since these visually resemble continuation strength while actually signaling weakening conviction or, in Bozu/Simultaneous Three Wings’ case, still bearish continuation — the trader must distinguish the classic form from its variant forms carefully, since they carry different implications.

Sanpo (Three Methods) — application: Treat as a pause, not a reversal — the correct response to a Rising Three Methods appearing in an uptrend is to expect a short rest before the climb resumes, not to exit the position; the mirror logic applies to Falling Three Methods in a downtrend (expect a short rebound before the decline resumes). This reinforces the reversal-vs-continuation discipline from Chapters 4–5: don’t mistake a Sanpo “rest” pattern for a genuine Sanzan/Sansen/Sanku reversal signal.

Chapter’s closing synthesis (Conclusion section): The author frames Sakata’s Five Methods as functionally parallel to Western classical charting theory’s own grouping of patterns into continuation and reversal categories (citing Edwards and Magee’s Technical Analysis of Stock Trends) — the notable point being that traders working independently, in different parts of the world and different time periods, converged on strikingly similar pattern-classification logic. This is presented as validation of the underlying market psychology these patterns capture, regardless of geography or era.

5. Active Recall Quiz

What are the two branches into which Homma’s original trading methods were divided, and which one predates the invention of candlestick charting?
List Sakata’s five original Constitution rules in your own words, and explain which two are framed primarily as risk-management principles versus which three require chart-reading skill.
Name the five “San-” pattern groups that make up Sakata’s Five Methods (Sanzan, Sansen, Sanku, Sanpei, Sanpo), and match each to its core concept in one phrase (e.g., “Sanzan = major longer-timeframe tops/bottoms”).
The chapter explicitly corrects a common misconception in candlestick literature. What is the mistaken belief about the “Three Rivers” (Sansen) group, and what does the author say it actually refers to instead?
What is the direct, unambiguous action rule associated with a Bullish Three Gaps (Sanku Fumiage) versus a Bearish Three Gaps (Sanku Nage Owari/Tatakikomi) formation?