Recently, a friend asked me whether it is still possible to buy or sell stocks when they hit the daily limit up or limit down. I realized that many beginners are actually not very clear about this concept, so today I want to talk about this issue.

Simply put, a limit up is when the stock price rises to the maximum allowed for the day, and a limit down is when it falls to the minimum limit. Taking Taiwan's stock market as an example, the regulation states that the daily price change cannot exceed 10% of the previous day's closing price. For instance, if TSMC closed at 600 dollars yesterday, the highest it can go today is 660, and the lowest is 540.

How do you determine if a stock has hit the limit up or limit down? The most straightforward way is to look at the candlestick chart. If the stock price movement becomes a straight line with no movement at all, it basically means it has hit the limit up or limit down. On the Taiwan stock market, a limit up is marked with a red background, and a limit down with a green background, making it easy to distinguish at a glance. You will notice that during a limit up, buy orders are piled up, and sell orders are almost nonexistent, because there are far more buyers than sellers; conversely, during a limit down, sell orders are everywhere, and buy orders are scarce.

Now, the key question—can you buy when the stock hits the limit up? The answer is yes, you can still place normal orders. But be aware that if you place a buy order, it may not be executed immediately because there are already many people queued up at the limit-up price waiting to buy. However, if you place a sell order, it will almost immediately be executed because there are so many buyers at that moment.

The situation is the opposite for limit down. Limit down does not prevent trading; you can still place orders. If you place a buy order, it will be executed immediately because there are many sellers. But if you place a sell order, you'll need to wait in line, as the limit-down price level is already filled with sell orders waiting to be traded.

From my own experience, the most common mistake when encountering limit up or limit down is blindly chasing the high or panicking and selling low. Seeing a limit up might make you rush to buy, and seeing a limit down might make you hurriedly sell, often resulting in getting stuck. The correct approach is to first understand why the stock hit the limit up or down. For example, if a stock hits the limit down but the company itself has no issues, just market sentiment dragging it down, it might rebound later. In such cases, small-scale positions could be considered. Conversely, when seeing a limit up, stay calm and verify whether there are real strong fundamentals supporting it; otherwise, it's safest to wait and observe.

Another strategy is that when a stock hits the limit up due to positive news, you might consider investing in related upstream or downstream companies or similar stocks, so you can participate in the trend. For example, if TSMC hits the limit up, other semiconductor stocks often move in tandem.

Finally, a note on the U.S. stock market: it doesn't have limit up or limit down restrictions, but they have a "circuit breaker" mechanism. Simply put, if stock prices fluctuate too violently, the system will automatically pause trading for a period to cool down the market. For the overall market, if the S&P 500 drops more than 7% or 13%, trading is halted for 15 minutes; for individual stocks, if they move more than 5% within a short period, trading on that stock will be temporarily suspended.

In summary, understanding the mechanisms of limit up and limit down is important, but more crucial is maintaining rationality and not letting market emotions lead you by the nose.