Can stocks still be traded when they hit the daily limit up or down? An investor's guide to handling extreme market conditions

Many stock market beginners have had this question: when the stock price hits the daily limit up or limit down, do they still have the opportunity to buy or sell? In fact, limit up and limit down are the most extreme fluctuations in stock trading, representing highly asymmetric buying and selling forces in the market. Understanding the nature of these two phenomena and how to make rational decisions when facing them is crucial for investors.

Limit Up and Limit Down: Two Forms of Extreme Market Fluctuations

What is Limit Up?

Limit up refers to the situation where a stock’s price rises to the maximum regulatory limit within a trading day. For example, in the Taiwan stock market, the daily increase cannot exceed 10% of the previous trading day’s closing price. Suppose TSMC closed at NT$600 yesterday; then, the limit up price today would be NT$660. After that, the stock price will be locked at this level and cannot rise further.

What is Limit Down?

Limit down is the opposite of limit up, indicating that a stock’s price falls to the regulatory minimum limit within a trading day. Using the same 10% rule in Taiwan, if TSMC hits the limit down, the lowest price would be NT$540, and the stock price will be frozen at this level, unable to fall further.

How to Quickly Determine if a Stock Has Hit Limit Up or Limit Down?

On trading software, the method is quite intuitive. When a stock’s price chart becomes a horizontal line with almost no movement, it is highly likely that the stock has reached the limit up or limit down. In the Taiwan stock market, stocks at limit up are usually marked with a red background, while those at limit down are marked with a green background, making it easy to distinguish.

The difference can also be clearly seen from the order book. At limit up, buy orders pile up on one side, while sell orders are almost nonexistent, as buying interest far exceeds selling willingness. Conversely, at limit down, sell orders pile up heavily, and buy orders are sparse.

Can You Still Buy and Sell When a Stock Hits Limit Up?

Can buy and sell, but the transaction probability varies greatly

During a limit up, investors can still place buy or sell orders normally. However, the key is that the probability of execution varies greatly.

If you place a buy order, because many buyers are already queued at the limit up price, your order may not be executed immediately and might need to wait until earlier buyers are filled.

If you place a sell order, the situation is quite different. Since there are far more buyers at the limit up price, your sell order will almost instantly be executed, as many buyers are waiting to purchase at that price.

Can You Still Buy and Sell When a Stock Hits Limit Down?

Can buy and sell, but buying usually executes instantly

The logic during limit down is the opposite of limit up. Investors can also place orders, but the results are completely different.

If you choose to place a buy order, because many sellers want to offload the stock and fewer buyers are willing to buy, your buy order will almost immediately be filled, as many sellers are eager to sell at the limit down price.

Conversely, if you place a sell order, you may face a long wait. Since the limit down price level has accumulated a large number of sell orders waiting to be executed, your order must queue, and the execution time is unpredictable.

What Causes Stocks to Hit Limit Up or Limit Down?

Common triggers for limit up:

1. Positive news catalysts: When a company announces excellent financial results (such as significant quarterly revenue growth or impressive EPS) or secures large orders (e.g., TSMC receiving major procurement orders from Apple or NVIDIA), it often immediately triggers a limit up. Policy-related positive stimuli, such as green energy subsidies or support policies for electric vehicle industries, can also stimulate market funds to aggressively buy related stocks.

2. Market chasing hot topics: AI concept stocks surge to limit up due to increased server demand, biotech stocks are frequent trading targets. During quarterly closing periods, fund managers and main capital tend to aggressively buy small- and medium-sized electronics stocks to boost performance, and even a spark can lead to a limit up.

3. Technical breakout signals: When stock prices break through long-term consolidation zones with high volume, or when high short-selling (margin) balances trigger short squeeze conditions, new buying interest floods in, causing the stock price to be locked.

4. Major institutional holdings are tightly locked: When foreign investors and fund managers continuously buy in large amounts, or when main players firmly control the chips of small- and medium-sized stocks, there are no stocks available for sale in the market. Any slight push can hit the limit up, making it difficult for retail investors to buy cheaply.

Common triggers for limit down:

1. Major negative news shocks: Earnings reports with losses (widening deficits, halved gross margins), company scandals (financial fraud, executive involvement), or industry downturns lead to a sell-off wave, making limit down almost unavoidable.

2. Market panic sentiment spreading: Systemic risk events like the COVID-19 outbreak in 2020 caused many stocks to hit limit down; international stock market shocks, such as a crash in the US stock market, led TSMC ADRs to plunge, dragging Taiwan tech stocks to limit down.

3. Main capital begins to offload: After a stock is driven high and then sold off, retail investors get trapped, making it hard to escape. More severely, margin calls can trigger forced liquidation, such as the shipping stock crash in 2021, where limit down instantly triggered margin calls, resulting in heavy selling pressure and retail investors unable to escape in time.

4. Technical breakdown: When stock prices fall below key support levels like the monthly or quarterly moving averages, triggering stop-loss selling, or when a large bearish candle appears (a signal of main players unloading), panic selling can easily lead to limit down.

Comparing Global Markets: Taiwan Has Limit Up and Limit Down, US Does Not

Taiwan’s stock market uses the limit up and limit down system, but the US stock market employs a different risk control mechanism — circuit breakers (also called automatic trading halts).

How US circuit breakers work:

When stock prices fluctuate too wildly, the system automatically pauses trading to calm the market, serving as a safety device to prevent excessive volatility.

US circuit breakers are divided into market-wide and individual stock circuit breakers:

• Market-wide circuit breakers: When the S&P 500 drops more than 7%, trading is halted for 15 minutes; at a 13% decline, another 15-minute halt; if the decline reaches 20%, the market closes for the day to prevent a crash.

• Individual stock circuit breakers: If a single stock’s price rises or falls more than 5% within a short period (e.g., 15 seconds), trading for that stock is halted temporarily. The standards and durations vary among different types of stocks.

Comparison of risk control between Taiwan and US markets:

Taiwan controls risk through a daily 10% price limit, freezing the stock at the limit price once reached; the US relies on circuit breakers, which pause trading when volatility exceeds preset thresholds rather than freezing the stock price.

Practical Strategies for Investors Facing Limit Up and Limit Down

Step 1: Rational analysis to resist chasing gains or panic selling

Beginners often make the mistake of rushing to buy at limit up or panic selling at limit down. The correct approach is to first understand the fundamental reason.

If a stock hits the limit down but the company’s fundamentals are sound and only short-term market sentiment or temporary factors are dragging it down, it is likely to rebound later. The wise strategy is to hold or add small positions and wait for a rebound.

Similarly, when a stock hits the limit up, do not rush. First, confirm whether there are genuine major positive catalysts supporting the move and whether these can sustain further price increases. If the positive factors are limited, it’s safest to observe and wait.

Step 2: Shift focus to related stocks or US alternatives

When a key stock hits limit up due to positive news, consider buying related upstream or downstream suppliers or industry peers. For example, a limit-up in TSMC often indicates the entire semiconductor supply chain will also rise.

Another strategy is to invest in the US-listed version of the same company. TSMC (stock code TSM) is also listed in the US, allowing investors to trade via cross-border trading or overseas brokers, avoiding the risk of being locked at the limit up in Taiwan stocks.