Analysis of Stock Market and Crypto Market Fluctuation Mechanisms: Principles of Price Limits and Trading Strategies

In the investment market, the terms "limit up" and "limit down" are extremely important for investors, as they represent the extreme states of price fluctuations and are the core of the market risk management mechanism. Whether in the traditional stock market or the crypto assets market, understanding how these mechanisms operate is crucial for developing effective trading strategies. So, when asset prices hit the limit up or limit down, can investors still trade? How to make reasonable decisions in such extreme market conditions?

Basic Concepts of Limit Up and Limit Down

What is a limit up/limit up board?

"Limit Up" (, also known as the limit up board, refers to the situation where the stock price rises to the maximum increase limit set by the exchange within a single trading day, at which point the price cannot continue to rise. This is a price ceiling mechanism established by the market, aimed at controlling excessive speculation and market fluctuations.

) What is a fall limit/fall limit board?

In contrast, "fall limit" ### also known as the fall limit board ( indicates that the stock price has dropped to the maximum decline limit for the day, and the price cannot fall further. This mechanism is mainly used to prevent the collapse effect caused by market panic.

Taking the Taiwan stock market as an example, regulatory authorities stipulate that the daily fluctuation of listed stocks cannot exceed 10% of the previous trading day's closing price. For instance, if a stock's previous closing price was 600 NTD, then the trading price range for that day is limited to between 540 NTD and 660 NTD.

Methods to Identify Limit Up and Limit Down States

When a stock hits the upper or lower price limit, its trend chart usually shows a horizontal straight line, indicating that the price has fixed at the extreme position. In the Taiwan stock exchange trading system, stocks that hit the upper limit are usually marked with a red background, while stocks that hit the lower limit are marked with a green background, making it easier for investors to quickly identify.

At the limit up, buy orders far exceed sell orders, resulting in a buildup of buy orders while sell orders are almost empty; conversely, at the limit down, sell orders accumulate in large quantities while buy orders are scarce. This order structure reflects the extreme state of market sentiment.

Feasibility of Trading Under Limit-Up Conditions

When a stock hits the upper limit, can investors still trade?

Even if the stock is at a trading limit, the trading system still allows orders to be placed, but the actual transaction situation may vary:

• Buy Orders: Orders can be placed normally, but due to a large number of buy orders waiting in line ahead, new buy orders may need to wait a longer time to be filled, and may even be unable to be filled on the same day.
• Sell Order: Usually can be executed immediately, as the market buy orders are active at this time, with a large number of investors willing to purchase at the pump price.

Feasibility of Trading Under Falling Limit Status

Similarly, when stocks hit the limit down:

• Buy Orders: They can usually be executed quickly since there is ample selling pressure, with many investors in the market looking to sell at the fall limit price.
• Sell Order: Although the system allows placing orders, due to a large number of pending sell orders ahead, new sell orders may need to queue and the execution time is difficult to predict.

Main Factors Leading to Stock Price Surge

Stocks hitting the upper limit are usually caused by the following factors:

1. Significant Positive News: The company releases better-than-expected financial reports, receives major orders ), such as semiconductor companies receiving large orders from tech giants (, and supportive industrial policies, all of which could trigger strong buying pressure to push stock prices to the limit.

2. Market Hot Topic Effect: Investors' enthusiastic pursuit of specific areas ) such as artificial intelligence and green energy technology (, or the demand from institutional investors for end-of-quarter accounting, may lead to a strong pump in related stocks.

3. Technical Breakthrough: The stock price breaks through long-term resistance levels, significantly increases trading volume, or experiences short covering, which often attracts a large amount of following buying, creating a limit-up situation.

4. Chip Concentration Effect: When the circulating chips of a stock are largely held by institutional investors or large traders, the market circulation decreases, and a small buying pressure can drive the stock price to reach the upper limit.

Main Factors Leading to Stock Price Freeze

Stocks often hit the limit down in the following situations:

1. Significant Negative Impact: Negative news such as company financial reports falling short of expectations, operational crises, financial fraud, or overall industry weakness often triggers panic selling.

2. Systemic Market Risk: Systemic risks such as the global financial crisis, significant public health events like the outbreak of COVID-19 in 2020, and other systemic risks may lead to large-scale market sell-offs.

3. Main Capital Withdrawal: Large investment institutions or main capital concentrated selling of shares often leads to liquidity exhaustion, triggering stock price limit down.

4. Technical Breakout: When the stock price breaks below a key support level and forms an important technical sell signal, it often triggers a chain reaction of sell-offs.

Comparison of Fluctuation Limitation Mechanisms in Major Global Markets

) limitations of traditional stock markets

Different markets have different methods for controlling stock price fluctuations:

| Market | Restriction Mechanism Type | Fluctuation Restriction Range | Effect After Triggering | |------|-------------|-------------|------------| | Taiwan Stock Market | Fluctuation Limit System | General Stocks 10% | Price Locked at Upper and Lower Limits | | US Stocks | Circuit Breaker Mechanism | Single Stock 5%/15 Seconds | Suspend Trading for a Period of Time | | Japanese Stocks | Dynamic Price Limits | Orders are rejected if they exceed the price range |

( Control of Fluctuation in the Crypto Assets Market

Unlike traditional stock markets, most Crypto Assets markets do not have unified limits for pump and fall, but various trading platforms typically implement their own Risk Management mechanisms:

• Mainstream CEX Platforms: Some mainstream exchanges set price fluctuation limits for specific trading pairs, such as the maximum price deviation of a single order or the cumulative price change limit within a short period.

• Price Monitoring Mechanism: Many trading platforms implement abnormal price monitoring and suspend trading activities for specific trading pairs when the market experiences abnormal fluctuations.

• Order Size Limit: Set a maximum trading volume for a single order to prevent large orders from causing significant impact on market prices.

• Circuit Breaker Mechanism: Some mainstream CEX platforms will activate protective measures similar to a circuit breaker during extreme market conditions, temporarily suspending trading when price fluctuations exceed preset thresholds.

Features of the US Stock Market Circuit Breaker Mechanism

Although the US stock market does not have a limit-up or limit-down system, its unique circuit breaker mechanism plays an important role during severe market fluctuations:

• Market-wide Circuit Breaker: When the S&P 500 index falls by 7%, 13%, or 20% in a single day, different levels of circuit breaker mechanisms are triggered. The first two levels result in a 15-minute trading halt, while the highest level leads to a complete market closure for the day.

• Individual Stock Circuit Breaker: A restriction mechanism set for abnormal price fluctuations of a single stock, usually triggered when the price change exceeds a preset threshold ), such as when the fluctuation exceeds 5% within 15 seconds ###, temporarily suspending trading of that stock for a period of time.

This mechanism is designed to give market participants time to think calmly, rather than completely preventing price adjustments.

Strategy Suggestions for Investors Facing Price Limits

Rational analysis, avoid emotional decision-making

When facing stock price limits on the rise or fall, investors should first analyze whether the reasons behind the extreme market conditions are sustainable. If it is merely driven by short-term market sentiment, one should remain calm and avoid blindly chasing highs and cutting losses.

Determining whether a stock that has hit its lower limit is worth entering depends on assessing whether the factors causing the fall are temporary or structural. For stocks with good fundamentals but affected by market sentiment or short-term factors, a staggered accumulation strategy can be considered.

Similarly, for stocks that hit the limit up, one should carefully evaluate whether the upward momentum can be sustained. If it is merely short-term speculation, the risk of chasing highs is relatively high, and waiting for a better opportunity may be a wiser choice.

( investment targets related to layout

When specific stocks hit the upper limit due to positive news, investors may consider paying attention to other targets related to their industry chain. For example, when a leading semiconductor company hits the upper limit, there may be undervalued investment opportunities among its supply chain or peer companies.

) Trading in alternative markets

For companies listed on multiple markets, if they encounter price limits in one market, they may consider trading in another market. For example, Taiwanese listed companies that also have ADRs (American Depositary Receipts) listed in the United States can serve as an alternative trading channel.

in the encryption market applications

Crypto investors can learn from the stop-loss and stop-gain strategies of traditional markets to respond during periods of significant fluctuation in the market:

• Set reasonable take-profit and stop-loss levels: Unlike the price limits in traditional stock markets, the fluctuation in the crypto market is much greater, making it particularly important to set automated take-profit and stop-loss levels.

• Investment Timing Diversification: Avoid investing all funds at once during extreme market conditions; using a staggered trading strategy can effectively mitigate Risk Management.

• Monitor Liquidity Indicators: Before executing large transactions, assess market depth and liquidity conditions to avoid causing price slippage during periods of insufficient liquidity.

• Choose the Right Trading Platform: Different trading platforms have different mechanisms for handling extreme market conditions. Choosing a mainstream CEX platform with comprehensive Risk Management can enhance the safety of your funds.

Macroeconomic Factors Behind Market Fluctuation Mechanisms

Understanding the macroeconomic driving factors behind market fluctuation mechanisms such as price limits is equally important for investors to formulate long-term strategies:

• Monetary Policy Changes: Adjustments in central bank interest rates and changes in the money supply directly affect market liquidity and investment sentiment, thus influencing the fluctuation of asset prices.

• Market Sentiment Cycle: The cyclical changes in investors' risk preferences can amplify market Fluctuation. During periods of extreme optimism or pessimism, it is often accompanied by more instances of pump or fall.

• Industry Innovation Impact: Technological innovations and industrial upgrades often trigger valuation restructuring in related sectors, leading to consecutive pump or fall trends in specific industry stocks.

The Market Significance of Risk Control Mechanisms

The price fluctuation limits such as price limits on rises and falls are not only regulatory tools but also an important component of the market microstructure:

• Provide a cooling-off period: Give investors ample time to digest significant information, avoiding excessive panic or blind optimism.

• Improve Price Discovery: By limiting extreme fluctuations in the short term, asset prices can better reflect fundamental value.

• Prevent Manipulative Behavior: Reduce the likelihood of market participants seeking undue benefits through the creation of short-term extreme fluctuations.

Understanding the fluctuation control mechanisms of different markets and the logic behind them helps investors maintain rationality in the face of extreme market conditions and make investment decisions that align better with long-term interests.