Recently, a friend asked me about stock limit-ups, and I realized that many beginners really don’t understand this area very well. In fact, limit-up and limit-down are pretty common phenomena in the stock market, but many people panic when they see them and don’t know how to respond.

Let me briefly explain it first. A limit-up means the stock price rises to the highest limit allowed for the day and can’t go higher; a limit-down is the opposite—when the stock price falls to the lowest limit for the day. Taking Taiwan as an example, regulatory rules say that the daily price movement of an individual stock cannot exceed 10% of the previous day’s closing price. For instance, if TSMC closed at 600 dollars yesterday, today its highest can only reach 660, and its lowest can fall to 540—that’s the basic idea.

How can you tell whether a stock has hit the limit-up? It’s actually simple: if you see the price chart turn into a straight line and it doesn’t move at all, then it’s very likely a limit-up or limit-down. On the Taiwan stock market, limit-up stocks are marked with a red background, while limit-down stocks are marked with a green background, so you can tell at a glance.

A question many people care about most is: when a stock hits the limit-up, can you still buy and sell? The answer is yes. During a limit-up, you can place orders, but note that if you want to place a buy order, it may not be filled immediately, because lots of people are already waiting to buy at the limit-up price. However, if you place a sell order, it will basically be executed right away, because there are so many buyers at that moment. Limit-down is the opposite: buy orders may get filled quickly, while sell orders may need to wait in line.

Based on my own experience, once you notice that a stock might hit the limit-down, it’s best to quickly place a sell order during the call auction period. That’s because the trading rule is “price priority, then time priority.” The earlier you place your order, the higher your rank, and the greater your chance of getting executed. After placing an order, don’t casually cancel and re-place it. Many people, seeing they haven’t sold yet, get anxious and rush to cancel and resubmit—but that often pushes their order to the very back of the queue, making it even harder to get filled.

So how exactly do limit-up and limit-down happen? Limit-up is usually triggered by good news from the company—such as strong earnings, receiving large orders—or when the market is driven by a popular theme (like AI-related stocks), causing money to rush in. Sometimes it’s due to technical strength, or major players tightly lock up the shares, leaving essentially no stock available to sell; then even a small push can directly lock the stock at the limit-up. Conversely, limit-down is typically caused by bad news, earnings disappointments, or widespread market panic. During the COVID-19 outbreak in 2020, many stocks just hit the limit-down and stayed there. Sometimes it’s because major shareholders start dumping, trapping retail investors; other times it’s a technical breakdown—falling below an important support level—and when stop-loss selling comes in, it’s easy for the stock to reach and lock at the limit-down.

Interestingly, the U.S. market is completely different. The U.S. market doesn’t have a limit-up/limit-down setting, but it has circuit breaker mechanisms. Put simply, when stock prices wildly spike or plunge to a certain extent, the system automatically pauses trading to give the market a chance to cool off. A market-wide circuit breaker means that if the S&P 500 index drops by more than 7% or 13%, the entire market takes a 15-minute break; if it drops 20%, trading stops for the day. A single-stock circuit breaker means that if a particular stock’s price change is too large within a short time (for example, rising or falling by more than 5% within 15 seconds), trading will be temporarily halted for a period of time.

When you encounter a limit-up or limit-down, my advice is to first stay calm and make a careful judgment. The most common mistake beginners make is to chase when they see a limit-up, and to panic-sell when they see a limit-down. But actually, you should first figure out why the stock hit the limit-up or limit-down. If a stock hits the limit-down but the company itself has no real problems—it's only being dragged down by market sentiment—then it may likely rise back later. In that case, holding it or initiating a small position could be a better choice. And when you see a limit-up, don’t rush to chase; first check whether there really is strong upside support and whether the stock can keep rising.

Another strategy is to trade related stocks. When a stock hits the limit-up because of good news, you can consider buying upstream or downstream suppliers closely related to it, or buying similar stocks in the same category. For example, when TSMC hits the limit-up, other semiconductor stocks often move along with it. Some Taiwanese stocks are also available to trade in the U.S., such as TSMC (TSM), which can be traded in the U.S., making the overall approach more flexible.