What is a limit up? Can you buy or sell during a limit up? A complete analysis of stock market limit up and down!

In the Taiwan stock market, you will see several stocks reaching their daily limit up or limit down every day, which makes many retail investors both excited and confused. I have personally experienced several times the predicament of watching a certain stock continuously limit up but being unable to buy in. What exactly is limit up? Why is it that even though my buy order has been placed, it still hasn't been executed? Today, let's talk about this common yet troublesome phenomenon for newbies in the market.

What are limit ups and limit downs?

A price limit up, commonly referred to as a "limit up board," means that the stock price has risen to the maximum allowed increase for the day according to trading rules and cannot rise any further. Conversely, a price limit down (limit down board) means that the stock price has fallen to the maximum limit and cannot continue to fall.

Taking the Taiwan market as an example, regulations state that the daily stock price of listed and over-the-counter stocks cannot exceed 10% of the previous day's closing price. For instance, if TSMC's closing price yesterday was 600 NTD, then today the highest it can pump to is 660 NTD, and the lowest it can fall to is 540 NTD. Once these price levels are reached, the stock price is "locked" in place.

How to tell if a stock is hitting the upper or lower limit?

It's very simple. When you notice that the stock price remains unchanged and the trend chart turns into a straight line, that stock is likely at its price ceiling or price floor. In the Taiwan stock trading system, stocks at their price ceiling are usually marked with a red background, while those at their price floor are marked with a green background, making it easy to see.

Looking at the limit-up stocks' orders, you will find that the buy orders are extremely high, while the sell orders are almost nonexistent. This is why the stock price hits the limit-up – there are too many buyers but too few sellers willing to sell. Conversely, for limit-down stocks, sell orders are overflowing, while buy orders are few and far between.

The price has pumped, can I buy it?

This is a confusion for many Newbies. I tell you, of course you can place an order to buy limit-up stocks, but to be honest, your buy order is very likely to not be executed.

Why? Because there are already a lot of people in front of you who want to buy, and there are very few willing to sell at the limit-up price. Unless a large number of sell orders suddenly appear at the limit-up price, causing the limit-up to "open," otherwise your buy order can only wait.

On the other hand, if you have a stock that is at its limit up and you want to sell, then congratulations, your sell order will be executed immediately. Because at this moment, the buying pressure is very strong, with many people waiting to take over your stock.

Has it hit the fall limit, can it be sold?

When the price hits the limit down, the situation is completely the opposite. If you want to buy at the limit down price, your buy order will be executed immediately, because there is huge selling pressure at this time, and the market is filled with sell orders waiting to be executed.

But if you want to sell at the limit down price, your sell order will likely be queued behind a large number of sell orders, and you won't know when it will be executed. I have a friend who once wanted to sell a stock when it hit the limit down, but his order didn't get executed before the market closed, and he could only watch helplessly as the stock price continued to hit the limit down for several days.

The circuit breaker systems of Taiwan, Hong Kong, and US stocks are very different

The Taiwan stock market has a strict 10% limit on price fluctuations, but the Hong Kong and U.S. stock markets do not have the concept of price limits; they use a "circuit breaker mechanism."

The U.S. stock market has two types of circuit breakers: broad market circuit breakers and individual stock circuit breakers. The broad market circuit breaker halts trading for 15 minutes when the S&P 500 index falls by 7% or 13%; if it drops by 20%, the market closes for the day. In March 2020, the U.S. stock market faced consecutive circuit breakers due to panic over the pandemic, causing global investors to be on edge.

The individual stock circuit breaker is aimed at a single stock. If the price of a certain stock fluctuates too much within a short period of time (for example, a rise or fall of more than 5% within 15 seconds), trading of that stock will be suspended for 5 minutes. This is done to allow market sentiment to calm down and to avoid excessive panic or speculation.

What to do smartly when encountering pump and fall?

First of all, don't blindly chase pumps and falls! This is a loss I have experienced. Once I saw a biotech stock hit its limit up for several days in a row, I followed up and bought in on the third day, and as soon as I bought in, it was at the top, and the next day it started to fall.

It is necessary to analyze the reasons behind the stock's pump or fall. If the company's fundamentals are not an issue and the fall is merely caused by fluctuations in market sentiment, it may rebound after a while. At this time, one can consider holding or adding a small amount. In the case of a pump, it is essential to see if there are significant positive factors supporting further increases. If not, waiting and observing is the wisest choice.

When I can't buy the stocks I want because they are at their limit up, I will consider related stocks. For example, when TSMC hits the limit up, I can look at other semiconductor stocks, which usually benefit as well.

If you can't buy stocks, what other trading options are there?

If you really want to participate in the market of a certain stock but cannot buy in, you can consider stock derivatives, such as stock futures, options, or warrants. However, these tools carry higher risks and are not very suitable for Newbie operations.

Contracts for Difference (CFD) are another option, as they do not have limits on price fluctuations, have a lower threshold, and offer flexible operations. CFDs provide higher leverage, allowing participation with small capital, and also enable short selling, but the risks are relatively higher. Remember to understand how these tools work and their risks before using them.

To be honest, I think sometimes not being able to buy a stock that is on a pump is a good thing. Many times, stocks that are pumped the next day just drop back to their original state, leaving those who chased after them trapped. Unless you have confidence to hold long-term, it's better not to get too excited and chase after pumped stocks.

There is an old saying in the stock market: "Calmness leads to victory, while impulsiveness leads to death." When facing a pump or fall, keeping a calm mind is the key!