Can stocks on limit up/down be traded? Analysis of limit up/down and investment strategies.

The terms “limit up” and “limit down” in the stock market are very familiar to us investors. Whenever we see stock prices forming a straight line, either glowing red or glaring green, our mood fluctuates accordingly. What market mechanisms are hidden behind such extreme price fluctuations? How should we respond to such situations?

What are limit up and limit down?

In simple terms, “limit up” means that the stock price has already risen to the highest point allowed for that day, while “limit down” means it has fallen to the lowest point. Taking the Taiwan stock market as an example, the price fluctuation is restricted to ±10% of the previous day's closing price. Assuming TSMC closed at 600 NT dollars yesterday, today the highest it can reach is 660 NT dollars, and it cannot drop below 540 NT dollars.

When the stock price hits this ceiling or floor, the trend chart will turn into a straight line. In the Taiwan stock market, stocks that reach the price limit will be displayed with a red background, while those that hit the lower limit will have a green background. At this time, the situation of buy and sell orders is very clear: when hitting the upper limit, buy orders queue up waiting to be executed, while sell orders are almost nonexistent; when hitting the lower limit, it is completely the opposite, with sell orders filling up and buy orders being scarce.

Can trading occur during price limits?

This is a common misunderstanding. In fact, orders can still be placed during limit up and limit down, but the opportunities for execution are different:

Limit up:

• Buy in? Sure, but you'll have to wait in line, there are a bunch of people in front.
• Sell? Easy transaction, because buyers are as numerous as the fish in the river.

Limit Down:

• Buy? Immediate transaction, sellers seek it but cannot obtain it.
• Selling? You have to queue up, the sell orders in front are frighteningly numerous.

Why do price limits occur?

Common reasons for a pump limit:

1. Bullish news: impressive financial report, securing major contracts, favorable policies
2. Popular Themes: AI, Electric Vehicles and Other Trends
3. Technical breakthrough: Stock price breaks through key resistance zone
4. Chips are locked: Foreign capital and investment trusts are buying heavily, or the main force is deliberately pushing up.

Common Reasons for Falling Limit:

1. Negative news: financial report disaster, company failure, industry recession
2. Panic sentiment: Systemic risks such as the outbreak of the pandemic and international stock market crashes.
3. Major Force Dumping: Selling after pumping up, financing liquidation
4. Technical Breakdown: Falling Below Important Support Line

I have personally witnessed many small-cap stocks being manipulated by major players. First, they pull up the price with several consecutive pump limits to attract retail investors, then suddenly dump their shares, causing the stock price to plummet, leaving retail investors unable to react and getting trapped. This method has been tried and tested, yet there are always new investors falling for it.

Differences Between the Taiwanese and American Stock Markets

The Taiwan stock market has a 10% limit on price fluctuations, while the US stock market adopts a circuit breaker mechanism:

U.S. Stock Market Circuit Breaker Mechanism:

• Market circuit breaker: S&P 500 falls 7% and halts for 15 minutes, falls 20% and directly closes the market.
• Individual stock circuit breaker: Trading is suspended for a period of time due to excessive fluctuation within a short period.

Both systems have their advantages and disadvantages. The fluctuation limits in the Taiwan stock market can prevent extreme fluctuations, but sometimes it prolongs panic for several days; the circuit breaker mechanism in the US stock market provides space for the market to calm down, but the fluctuations may be more intense.

Investment Strategies During Pump and Fall Limits

1. Stay calm and analyze rationally: Don't let emotions lead you. A price surge doesn't necessarily mean you should chase after it, and a price drop isn't always a good opportunity to buy at a bargain. Analyze the underlying reasons and determine whether it's a short-term fluctuation or a long-term trend change.

2. Pay attention to related stocks: When a stock hits the upper or lower limit, other companies in the same industry chain are often affected as well. When TSMC hits the limit up, it’s worth checking its supply chain; when a certain biotech stock plummets, similar stocks may also be dragged down.

I once blindly chased after an IC design stock after it hit the limit up, only to find it opened high and fell the next day, as the main players had already sold at the peak. This lesson made me realize that emotional trading only turns oneself into someone else's ATM.

When faced with price fluctuations, the most important thing is to see the essence of the market and not be misled by short-term fluctuations. Sometimes, the best decision might be to do nothing and watch the changes. After all, in this market, those who rush to enter are usually the last ones to get trapped.