You must use adjusted historical price data for stock charts
What is adjusted historical price data and what it means?
Corporate actions like stock splits, consolidations and special dividends create price gaps during trading. Savvy traders and investors know when these gaps will happen, what they mean and how to deal with them but new investors are usually uninformed. Good charting software usually provide adjusted historical price data so that these gaps are given the correct treatment but many others continue to offer unadjusted data.
More on price gaps and their adjustments from stockcharts.com:
We adjust our historical price data to remove gaps caused by stock splits, dividends and distributions. That may cause our charts to look different from other services that do not perform the same adjustments.
What happens to price when there is a corporate action?
For example, if a stock splits 2-for-1, the price is suddenly half of what it used to be creating a large gap down on the chart. If you were unaware of the split, the chart would give you the impression that something bearish happened to the underlying company. In addition, most of the technical indicators on that chart would give sell signals because of the big drop in prices. Even those such a split is generally considered a neutral event, an unadjusted chart would contain lots of bearish signals.
What does price adjustment do?
In order to prevent these kind of misleading signals from appearing on our charts, whenever a 2-for-1 split occurs, we divide all of the historical prices for the stock by 2 and multiply all of the historical volume by 2 so that the bars prior to the split match up smoothly with the bars that appear after the split.
In addition to performing adjustments that remove large gaps caused by splits, we also adjust our historical data to remove smaller gaps caused by dividends and distributions. By making these additional adjustments, we ensure that all price movements on our charts are caused by pure market forces – i.e., the forces that Technical Analysis attempts to identify.
Although gaps due to corporate actions are rare, discrete events, their existence on a chart can affect the outcome of many trading indicators over a long period of time. Therefore, the simplest way for chart users to protect themselves is to insist that they use a charting software that has adjusted historical price data.
Corporate actions that require adjustments to historical price
- Stock splits
- Stock consolidations
- Special dividends
- Bonus shares, rights, warrants
Regular dividends do not require price adjustment.
Does my price chart show adjusted historical price or not?
How to spot unadjusted historical prices
In this example, Jaya Holdings (J10.SI) had a $0.625 special dividend on 10 June 2014.
The first and foremost thing that comes to your attention is a price gap (see chart above). A price gap is a strong hint that some corporate action has taken place although not all gaps are caused by corporate actions. Verify quickly with the company’s investor relations webpage, stock exchange, newswires or financial portals such as Sharesinv.com.
If you are using a paid-for data service, this information should be available readily. See below screenshot of Datafolio – a paid-for data service for SGX stocks that prompts users to corporate actions and data adjustments.
unadjusted historical price data and who does not
- Charting softwares and browser based charting platforms do not usually say explicitly whether their data is adjusted or not.
- If they do, the message can usually be found on in supporting documentation that requires some effort to look. The example from stockcharts.com is in my opinion the right thing to do.
- I admit that this is a bit of stereotyping involved but expect free charting platforms to provide unadjusted price data. Why? Because adjusted historical price data is a feature that can be offered in a fee-based service. (And because stock exchanges do not provide price adjustments to data vendors for free.)
- At last look, free charts from Yahoo! Finance and Bloomberg carry unadjusted prices.
Unadjusted historical price affects your trading performance!
Once a price gap appears on a chart, a person reading the chart will start to get very different outcomes; price levels like support and resistance may appear very far away while trading indicators will start to produce different signals. Trend lines become obsolete. Data adjustments change historical price so that the gap may be eliminated or reduced in line with data standards that are accepted by chart users all over the world. Trading signals will also be corrected.
Noticeable changes before and after in this example:
1. After adjustment, price gap is closed or reduced
2. The values for (past) historical data are different
3. and 4. Trading indicators like Bollinger Bands and RSI shown here also have vastly different values that affect trading decisions
I don’t have access to charts with adjusted data. What can I do?
Take note that trading indicators will require time to correct themselves naturally. For example a 10-period RSI uses 10 days of price information to arrive at its value so T+10 (10th day after corp. action appears in price) is the amount of time for kinks caused by the corporate action and price gap to disappear from the RSI reading. (Note: Some traders also look for chart patterns, levels and divergence from RSI which unfortunately takes a lot longer to correct.) Longer term indicators like a 200-day moving average will say bye bye to its kinks only on T+200. Refrain from affected charts until their indicators have corrected themselves. The other way: avoid them.