How to trade when stocks hit the daily limit up or down? An essential guide for investors on operation strategies and risk management

In the process of investing in the stock market, the phenomena of “limit up” and “limit down” often attract special attention from investors. These extreme market conditions represent moments when buy and sell forces are highly asymmetric. This article will delve into the nature of these special phenomena, trading rules, and how investors should properly respond.

What are Limit Up and Limit Down? Basic Definitions Clarified Once

Limit Up refers to the situation where a stock’s price rises to the maximum allowable limit set by the government or exchange within a trading day, causing the price to be frozen and unable to continue rising. Conversely, Limit Down occurs when the stock’s price falls to the daily minimum limit, preventing further decline.

For example, in the Taiwan stock market, regulatory authorities set the daily price fluctuation limit at ±10% of the previous day’s closing price for listed and OTC stocks. Suppose a stock closed at 600 NT dollars the day before; then, the highest price for the current day can only reach 660 NT dollars, and the lowest 540 NT dollars. Once these boundary prices are reached, the stock will remain at that price, forming a “one-line” chart pattern.

Visually on the trading screen, the Taiwan stock market uses color coding for easy identification: limit-up stocks are shown with a red background, while limit-down stocks are marked with a green background.

The Reality of Trading During Limit Up and Limit Down: Can You Buy or Sell, But There Are Nuances

Many investors are confused about whether trading is possible during limit up or limit down periods. The answer is yes—traders can place orders during both limit up and limit down, but the likelihood of execution varies significantly.

During Limit Up:

• If you place a sell order, the high buy volume makes execution quite likely.
• If you place a buy order, you need to queue behind existing buy orders; immediate execution is not guaranteed.
• This is because there are far more buyers than sellers.

During Limit Down:

• If you place a buy order, the heavy selling pressure causes your order to be quickly filled.
• If you place a sell order, you need to queue at the asking price; execution is uncertain.
• At this time, there are more sellers than buyers.

This phenomenon is especially important for day traders. When holding positions during a limit down and attempting to reduce risk through intraday trading, the inability to sell can turn into overnight risk. Therefore, liquidity issues during limit down are a critical factor that day traders must consider in advance.

Why Do Stocks Hit Limit Up or Limit Down? Analyzing the Driving Forces

Main Factors Triggering Limit Up

1. Major Positive News Incentives When a company releases impressive financial reports (revenue growth, EPS surges) or secures significant orders, market funds rapidly flow in. For example, if TSMC secures large orders from Apple or NVIDIA, its stock price often hits the limit up directly. Government industry policy benefits (such as green energy subsidies or electric vehicle support) also frequently trigger collective limit-ups in related stocks.

2. Thematic Speculation and Capital Concentration AI concept stocks surge due to increased server demand, biotech stocks become quarterly trading stars, and during quarter-end window dressing, institutional investors and major players boost performance by lifting small- and mid-cap electronics stocks—these are typical examples of capital chasing high, easily triggering limit-ups.

3. Technical Breakouts When stock prices break through long-term consolidation zones with increased volume, or when high short interest (margin short positions) triggers short squeeze dynamics, buying momentum surges, locking the stock price.

4. Concentration of Chips in Major Holders When foreign investors or institutional investors continuously buy heavily, and major players lock in chips of small- and mid-cap stocks, circulating supply becomes scarce. A slight push can easily cause a limit up, making it difficult for retail investors to buy.

Main Factors Triggering Limit Down

1. Negative News Impact Earnings warnings (losses widening, gross margin decline), corporate scandals (financial fraud, executive involvement), or industry downturns can cause panic selling, rapidly spreading market fear and leading to limit down.

2. Systemic Risks and Market Panic Unexpected major events (such as the COVID-19 pandemic in 2020) can trigger irrational panic among investors, causing many stocks to hit limit down. International market volatility (e.g., US stock crashes causing TSMC ADRs to plummet) can also drive Taiwan tech stocks to limit down.

3. Major Players Offloading and Margin Calls After hype-driven rallies, major players may start unloading holdings, trapping retail investors. More severe is margin calls—such as the shipping sector crash in 2021, where triggered margin calls caused a surge in selling pressure, catching retail investors off guard.

4. Technical Breakdown Breaking below key support levels like the monthly or quarterly moving averages, or sudden large-volume black candlesticks, often signal major players offloading, with stop-loss selling pressure leading to limit down.

How Do Global Stock Markets Handle Limit Up and Limit Down? Why Are They Different in the US?

The limit-up and limit-down system in Taiwan is quite different from that in the US. The US stock market does not have limit-up or limit-down restrictions; stock prices can theoretically fluctuate freely. To prevent excessive volatility, the US employs “circuit breakers” that automatically halt trading.

Market Circuit Breaker Standards:

• When the S&P 500 drops more than 7%, trading pauses for 15 minutes.
• When the decline reaches 13%, another 15-minute halt occurs.
• If the decline hits 20%, the market closes for the day.

Individual Stock Circuit Breaker Standards: If a stock’s price moves more than 5% within 15 seconds, trading is temporarily halted. Exact thresholds vary depending on the stock type.

Investor Strategies: Rational Decision-Making Instead of Blind Following

Strategy One: Understand the Cause Before Deciding to Enter or Exit

Many novice investors make the biggest mistake of blindly chasing gains or cutting losses. When encountering limit up or limit down conditions, first, thoroughly understand the underlying reasons.

If a stock hits limit down but the company’s fundamentals are sound, and the decline is due to short-term market sentiment or external factors, the stock is likely to rebound later. Holding or adding a small position may be a better approach.

If a stock hits limit up, avoid rushing to buy immediately. First, assess whether the positive news has sustainable momentum. If the bullish factors are unlikely to continue, it’s best to wait and see.

Strategy Two: Use Interrelated Trading and Alternative Investments

When a leading stock hits limit up due to major positive news, consider shifting to related upstream or downstream companies, or peers in the same industry, which often move in tandem. For example, if TSMC hits limit up, other semiconductor stocks usually also rise.

For investors holding US-listed Taiwanese stocks, they can also trade via foreign brokers or overseas trading platforms. For instance, TSMC is listed on the US stock market as TSM, providing an alternative way to bypass Taiwan’s liquidity restrictions.

Strategy Three: Risk Management for Day Traders

For day traders, the risk of being unable to sell during a limit down is significant. Establishing positions during a limit down can lead to being unable to exit timely or being forced to hold overnight. Therefore, day traders should evaluate stock liquidity early on, avoid building large positions during high-risk limit down periods, and set stop-loss points accordingly.

The core of investment decision-making is rationality over emotion—a limit up is not necessarily a buy point, and a limit down does not always mean a sell signal. The key is to fully understand market dynamics and assess individual stock fundamentals to protect your capital during extreme conditions.