Trading strategy after price surge: A comparison of the limiting functions of the stock market and the crypto market

When prices rise or fall significantly, what kind of trading restrictions exist in the market? In the stock market, there is a mechanism called "price limits (limit up and limit down)," but a different system is adopted in the crypto market. Let's understand the differences between the two markets and learn effective trading strategies.

What is Price Limit: The Basic Concept of Stop High and Stop Low

What is a price limit (rise) of ###?

Limit Up refers to the state when a stock price has risen to the allowable daily limit. Once this price is reached, no further increase in value can occur.

What is a stop loss (lower limit) ###?

Limit down is the opposite of limit up, and it refers to a situation where the stock price has fallen to the allowable lower limit for the day. Once this price is reached, further declines are not possible.

For example, many markets have a price limit of ±10% from the previous day's closing price. In the case of a stock that closed at 600 yen the previous day, the upper limit for the next day would be 660 yen, and the lower limit would be 540 yen.

How to Identify During Price Surge and Drop

When the stock price chart becomes completely horizontal and the movement stops, it is highly likely that the stock is at its upper or lower limit. In many trading systems, stocks at the upper limit are displayed in red, while stocks at the lower limit are displayed in green.

In the case of a limit up, there are many buy orders while there are hardly any sell orders, causing the price to be fixed at the upper limit. Conversely, in the case of a limit down, there are many sell orders and hardly any buy orders.

Trading Availability When Price Ceiling is Reached

Can you trade at the upper limit of ###?

Orders can still be placed even at the upper limit. You can place a buy order, but there is no guarantee that it will be executed immediately. This is because many buy orders are already waiting at the same price. On the other hand, if you place a sell order, it will be executed almost instantly. This is due to the abundance of buyers.

Trading at the Limit Up

• Buy order: possible, but execution is uncertain
• Sell order: almost guaranteed to be executed

Can I trade at the stop limit?

You can also place orders at the stop limit. If you place a buy order, it will be executed almost instantly because there are many people who want to sell. On the other hand, there is a high possibility that sell orders will be queued.

Trading at Stop-Loss Limit

• Buy order: Almost guaranteed to be executed
• Sell orders: possible, but execution is uncertain

Major Factors Behind Price Surges and Crashes

Main reasons for the price surge:

1. Impact of Positive Information: Strong performance announcements, large order acquisitions, and announcements of industry support policies can trigger sharp price increases.

2. Inflow of funds into popular themes: Sectors that are gaining attention in the market, such as AI-related stocks and biotechnology stocks, tend to attract concentrated funds and are likely to experience sharp price increases.

3. Technical Factors: An increase in trading volume during long-term range breaks and the unwinding of short positions can be factors contributing to a sharp rise.

4. Movement of Fund Holders: Continuous large purchases by institutional investors or in the case of small-cap stocks with a limited number of outstanding shares, the price may easily rise to the upper limit.

Main reasons for the sharp price drop:

1. Impact of Negative Information: Poor performance, discovery of accounting fraud, misconduct of management, decline of the entire industry, etc. can trigger a sharp drop.

2. Panic in the Overall Market: When systemic risks manifest, such as the spread of infectious diseases or a sharp decline in international markets, many assets can simultaneously plummet.

3. Selling Pressure from Large Investors: When institutional investors begin to sell off their holdings in large quantities, individual investors tend to follow suit to avoid losses, leading to an acceleration of selling pressure.

4. Deterioration of Technical Indicators: When sell signals such as breaking below significant moving averages or long bearish candles accompanied by high sell volumes occur, the decline may accelerate.

Differences in Price Limits between the Stock Market and the Crypto Market

crypto market "circuit breaker" function

Unlike the stock market, the crypto market does not have strict price limits, but many exchanges adopt a system called circuit breaker.

"Circuit Breaker" refers to:

This is a mechanism that temporarily halts trading when prices fluctuate sharply in a short period of time. It functions as a "timeout" to regain composure.

In many cryptoasset exchanges, if the price of an individual asset fluctuates by a certain percentage (e.g., 5%) or more within a short time (e.g., 15 seconds), trading for that asset will be temporarily suspended. The suspension period is usually for a few minutes, after which trading resumes.

| Market | Individual Stock Price Limits | Volatility Control Methods | |---------|-------------------|--------------| | Stock Market | Yes | Limited to a certain percentage (e.g., 10%) from the previous day's closing price | | crypto market | None | temporarily halt trading during extreme volatility (circuit breaker) |

Investment Strategies During Price Rises and Sharp Declines

Avoid emotional trading with calm judgment.

When prices rise or fall sharply, a common mistake that beginners tend to make is trading based on emotions. It is important to first analyze calmly why that price fluctuation occurred.

For example, if the price drops to the lower limit, but this is due to temporary market sentiment and there are no issues with the fundamental value, it may actually present a good opportunity. In such situations, it might be wise to consider holding on or making a small additional investment.

Conversely, when the price surges, it is also important to carefully assess the underlying factors. It is crucial to determine whether there is a real potential for sustained growth or if it is merely a temporary speculation.

Utilization of related assets and alternative markets

If a certain stock reaches its price ceiling, focusing on stocks of other companies in the same industry or related sectors is also a strategy. For example, if semiconductor-related stocks reach their price ceiling, other companies in the supply chain may also benefit.

Additionally, there are ways to leverage markets with different trading hours and regulations. Many cryptoasset exchanges allow for 24-hour trading, providing the advantage of being able to respond immediately to market trends worldwide. Major trading platforms also ensure sufficient liquidity, making it less likely to miss trading opportunities.

Trading Strategy After Price Surge

In the crypto market, what kind of strategy is effective the day after a sharp price rise? According to knowledge-based information, in traditional markets like the S&P 500, price reversals (pullbacks) are frequently observed after a rise, but it is also understood that a recovery can be expected thereafter.

The following are effective strategies using technical indicators:

1. Combination of Moving Averages and RSI: If the price is above the short-term moving average and the RSI is not in an overbought state, there is a possibility of a continuous rise.

2. Setting a clear exit strategy: Manage risk by taking profits when signs of a trend reversal are observed or when the RSI reaches overbought territory.

3. Thorough Risk Management: Set a stop-loss line to limit losses in case the price moves in the opposite direction of expectations.

In the crypto market, price fluctuations tend to be larger than in traditional financial markets. Therefore, proper risk management and the establishment of clear trading rules become particularly important.