Can you still trade when the stock price hits the daily limit up or down? Analyzing investment strategies during extreme volatility

The most eye-catching phenomenon in the stock market is the extreme movement of stock prices. When stocks hit the limit-up or limit-down, many investors often feel confused—can they still buy or sell? What market signals do these phenomena represent? Today, we will delve into this important topic that every investor must read.

What Do Limit-Up and Limit-Down Really Mean?

Understanding the Meaning of Limit-Up

Limit-up refers to the situation where a stock’s price has reached the regulatory maximum increase within a single trading day and cannot rise further. For example, in the Taiwan stock market, the daily fluctuation limit for listed and OTC stocks is 10% of the previous trading day’s closing price. Suppose TSMC closed at 600 NT dollars yesterday; today, the maximum increase is only up to 660 NT dollars, triggering the limit-up.

Understanding the Meaning of Limit-Down

Limit-down is the opposite—when the stock price has fallen to the lower limit for the day and cannot decline further. Using the same example, TSMC’s lowest price can only drop to 540 NT dollars. Once it reaches this level, trading is frozen.

On the trading screen, it’s quite easy to identify: limit-up stocks are marked with a red background, and the price trend chart shows a horizontal straight line; limit-down stocks are marked with a green background, also appearing as a flat line. This “freezing” state reflects extremely consensus among market participants—either collective optimism or collective pessimism.

Can You Still Buy and Sell When the Price Hits the Limit?

Many people think that once the price is locked at the limit, trading is impossible—that’s a misconception.

Trading during limit-up: Although orders can still be placed, execution depends on your order type. If you place a buy order, since buy orders are already queued, your order may need to wait; if you place a sell order, due to the scarcity of sellers, it will likely be executed quickly. In short, sell orders are prioritized for execution, while buy orders depend on queue position.

Trading during limit-down: The situation is completely opposite. At this time, sell orders pile up, and buy orders will be executed immediately, but placing a sell order requires patience because there are few buyers.

The Hidden Drivers Behind Extreme Price Fluctuations

Common Reasons for Limit-Up Stocks

1. Major positive news catalysts
When a company releases impressive financial reports—for example, quarterly revenue surges, earnings per share grow significantly, or it secures large orders (like TSMC landing chip orders from tech giants)—it often triggers a buying frenzy. Additionally, policy incentives such as subsidies for green energy industries or support policies for electric vehicles can also push related stocks to hit the limit-up.

2. Thematic hype waves
AI concept stocks surge due to increased server demand, biotech stocks rise with clinical trial progress, and fund managers aggressively buy IC design stocks during quarterly performance pushes—these are common themes. When market sentiment ignites, stock prices can easily lock at the limit.

3. Technical breakthroughs
Prices break out of long-term consolidation zones with high trading volume, or high short interest triggers short squeeze rallies, attracting a flood of chasing buyers.

4. Tight chip holdings
When foreign investors and fund managers continue to buy heavily, or major players lock in chips of small and medium stocks tightly, the circulating shares decrease. A small spark can lock the stock at the limit-up, making it difficult for retail investors to buy cheap shares.

Common Reasons for Limit-Down Stocks

1. Negative news shocks
Disappointing financial results (wider losses, declining gross margins), scandals (financial fraud, executive involvement), or industry downturns can cause panic selling, making it hard for stocks to avoid hitting the limit-down.

2. Systemic risk spread
The COVID-19 pandemic in 2020 caused many Taiwan stocks to hit the limit-down; or a crash in US indices led to a plunge in TSMC ADRs, which then dragged down Taiwan tech stocks collectively. Such risks are often unstoppable.

3. Main players offloading and stop-loss effects
Major players inflate prices to trap retail investors, then offload holdings; or margin calls trigger forced selling, leading to a surge in selling pressure. Investors are often caught off guard. The 2021 shipping stock crash is a typical example of this phenomenon.

4. Technical breakdown
Breaking below key support levels like the monthly or quarterly moving averages triggers stop-loss waves; or sudden large black candlesticks signal major players dumping stocks, with subsequent stop-loss selling enough to push prices to the limit-down.

Differences in Volatility Control Mechanisms Between Taiwan Stocks and US Stocks

Taiwan stocks use the “limit-up/limit-down” system, with a daily fluctuation cap of 10%. Once the price hits the limit, it is directly frozen.

In contrast, US stocks have no individual stock limit-up or limit-down restrictions but employ an “circuit breaker” (also called automatic trading halt). This mechanism automatically pauses trading when prices fluctuate excessively, giving the market time to cool down.

The circuit breaker has two levels:

Market-wide circuit breaker:

• When the S&P 500 drops 7%, trading pauses for 15 minutes;
• When it drops 13%, another 15-minute pause;
• When it hits 20%, the market closes for the day.

Single stock circuit breaker:

• When a stock’s price moves more than 5% within about 15 seconds, trading is halted temporarily;
• The duration depends on the stock’s characteristics.

These two systems each have their merits—Taiwan directly locks the price, while the US provides room for adjustment.

How to Respond During Extreme Volatility

Step 1: Stay Calm and Analyze, Overcome Emotions

The most common mistake for beginners is chasing after limit-up stocks or panicking at limit-down stocks. The correct approach is to clarify the reason first.

If a stock hits the limit-down but the company’s fundamentals are sound and only short-term market panic or seasonal factors cause the decline, a rebound is likely. The strategy then is to hold or add small positions and patiently wait for recovery.

Conversely, when seeing a limit-up, don’t rush to buy at the high. First, assess whether the positive news can support further gains. If confidence is lacking, it’s wiser to wait and see.

Step 2: Shift to Related or Overseas Stocks

When a stock hits the limit-up due to major positive news, consider buying related upstream or downstream companies or peers. For example, when TSMC hits the limit-up, other semiconductor stocks often follow suit.

Many Taiwanese listed companies are also traded on US exchanges, with TSMC(TSM) as a prime example. Using cross-trading or overseas brokers, you can bypass the limit-up restrictions and gain more flexible trading opportunities.

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Understanding the meaning of limit-up and limit-down, grasping the market logic behind them, allows you to stay rational during extreme volatility and make smarter investment decisions.