Stock Price Limit Up and Trading: Characteristics and Investment Strategies of the Taiwanese Stock Market

Today at the Taiwan Stock Exchange, an astonishing 23 stocks reached their upper limit. Among them, the ones that particularly deserve attention are 智捷(8176), 國精化(4722), and 博磊(3581). In such a market, how should we investors respond when we encounter stocks that hit the upper or lower limits?

What are Limit Up and Limit Down?

Limit Up refers to a state in which the stock price has reached the maximum limit it can rise during the day's trading. In market terminology, it is also referred to as "Limit Up Board."

On the other hand, limit down is the state where the stock price has reached its maximum decline limit. It is also referred to as the "limit down board."

In the Taiwan market, the price fluctuations of listed and over-the-counter stocks are limited to ±10% of the previous day's closing price. For example, if TSMC closed at 600 TWD yesterday, today's price can only move up to a maximum of 660 TWD and a minimum of 540 TWD.

How to Distinguish Between Limit Up and Limit Down

When the stock price chart completely stops moving and becomes a straight line, it is likely a limit up or limit down. In the Taiwanese stock market, limit up stocks are displayed with a red background, while limit down stocks are shown with a green background, making it easy to tell at a glance.

In a state of a limit up, buy orders flood in while there are almost no sell orders, causing the order book to be fixed. In the case of a limit down, it is the opposite, with sell orders flooding in and there are almost no buy orders.

Can stocks at the upper and lower price limits be traded?

Of course, you can trade!

If you want to buy a stock at the upper limit price: You can place an order, but there is no guarantee that it will be executed immediately. This is because there are many orders waiting at the upper limit price. Conversely, if you are selling, it will almost certainly be executed immediately. This is because there are many buyers.

When buying stocks at the limit down: Orders are executed almost instantly. This is because there are many people wanting to sell. However, when selling, it may take time for the order to be executed because there are many sell orders waiting at the limit down price.

What Causes Limit Up and Limit Down?

Main causes of the limit up:

1. Announcement of Good Materials: Earnings surpassing expectations, acquisition of large orders, etc.
2. Inflow of funds into popular themes: AI-related stocks and performance embellishment by institutional investors at the end of the term.
3. Technical Turnaround: Short covering in stocks with long-term range breakouts or high short interest.
4. Imbalance of Supply and Demand: Concentrated buying by foreign investors and investment trusts, and stockpiling in illiquid small-cap stocks.

Main causes of the stop-loss price:

1. Announcement of Bad News: Earnings below expectations, accounting fraud, misconduct of executives, etc.
2. Market Panic: Systemic risks such as COVID-19, the impact of the massive crash in the US market
3. Institutional Investors Dumping: The act of fleeing while leaving individual investors who bought at high prices behind.
4. Collapse of Technical Support: Such as breaking below important moving averages

Differences from the US Market: Circuit Breaker System

Unlike Taiwan, the US market does not have limits on upper or lower price limits. Instead, there is a mechanism called a 'circuit breaker'.

This is a system that temporarily halts trading when stock prices fluctuate sharply. In the U.S. market, trading is suspended for 15 minutes if the S&P 500 index falls by 7% or 13%. If it drops by 20%, trading for the day is concluded.

Individual stocks also have circuit breakers, and if the stock price fluctuates significantly in a short period (for example, more than 5% in 15 seconds), trading will be halted for a certain period.

How to Deal with Stocks at the Upper and Lower Limits

1. Make calm judgments and avoid blind following It is important to identify the causes of price limits. Let's determine whether they are temporary factors or fundamental changes.

2. Investment in related tokens and US stocks When a popular stock hits the limit up, related stocks and companies in the supply chain often start moving as well. For example, if TSMC hits the limit up, other semiconductor-related stocks may also follow suit.

In addition, for companies that are listed on both Taiwanese and US stock markets (e.g., TSM of TSMC), there is also the option to trade in the US market.

I have personally encountered stocks that hit their upper and lower limits many times, but I feel that it is most important to calmly analyze the reasons without being swayed by emotions. I believe that having the patience to wait for the next wave, rather than rushing to chase after it, is the key to long-term investment success.