Recently, many novice investors still don't quite understand the trading rules for limit-up and limit-down stocks, so I decided to organize my observations to help everyone clarify their thinking.

Speaking of which, limit-up and limit-down are the most extreme phenomena in the stock market. Simply put, when a stock's price rises to the maximum limit allowed for the day, it's called a limit-up; conversely, when it falls to the minimum limit, it's a limit-down. Taking Taiwan's stock market as an example, the regulation states that the daily price change limit for listed and OTC stocks cannot exceed 10% of the previous day's closing price. For instance, if TSMC closed at 600 NT dollars yesterday, today it can only go up to 660 NT dollars or down to 540 NT dollars—that's it, quite straightforward.

When looking at the market, limit-up stocks are marked with a red background, and limit-down stocks with a green background, making them easy to identify at a glance. You will also notice that limit-up stocks have a lot of buy orders listed, while sell orders are almost empty because the demand to buy far exceeds the supply to sell, causing the price to be locked. Conversely, limit-down stocks are the opposite—sell orders are abundant, and buy orders are sparse.

Many people often ask: Can limit-up stocks still be bought and sold? The answer is yes, but you need to pay attention to the likelihood of transactions. If you place a buy order, it may not execute immediately because there are already many people queued ahead of you. However, if you place a sell order, it can usually be filled right away because there are many buyers at that moment. The same applies to limit-down stocks—it's just the opposite logic—placing a buy order will likely execute immediately, while a sell order might need to wait in line.

Regarding what to do if a stock is locked at the limit-down price, my advice is that once you suspect a stock might hit the limit-down, you should quickly place a sell order during the opening auction. This is because the trading rule is "price priority, time priority"; the earlier you place your order, the higher your position in the queue, and the greater your chance of execution. After successfully placing the order, it's best not to modify it recklessly. Some people see that their stock hasn't sold and rush to cancel and re-enter orders, but this can push them to the back of the queue, making it even harder to execute. Also, pay attention to the buy-side order volume at the limit-down price. If a large amount of buy orders suddenly appear, it could be a sign that institutional investors are stepping in to buy, and you might consider selling along with them—but act quickly. Additionally, in the last 10 to 15 minutes before the market closes, limit-down stocks often experience a brief liquidity release, with funds entering to pick up bargains. This is also the last chance to sell at the end of the day.

What causes stocks to hit the limit-up or limit-down? Limit-ups are usually driven by positive news, such as the company releasing good financial reports, receiving large orders, or government policy benefits, prompting market funds to rush in immediately. Popular themes like AI concept stocks or biotech stocks, which are frequently hyped, also often trigger limit-ups, especially during quarter-end window dressing periods when fund managers and major players aggressively buy small and medium-sized electronics stocks to boost performance. Technical strength can also trigger limit-ups, such as a stock breaking out of a long consolidation phase with high volume, or when high short interest leads to a short squeeze. Lastly, when large institutional investors lock in their positions—such as foreign investors or fund managers continuously buying large quantities, or major players tightly controlling the chips of small and medium stocks—there are hardly any stocks left to sell in the market.

The reasons for limit-down are more unfortunate. First, negative news such as disastrous earnings reports, financial fraud, or industry downturns can cause panic selling, making it hard to avoid a limit-down. Market sentiment can also cause limit-downs; for example, during the systemic risk outbreak of COVID-19 in 2020, many stocks directly hit the limit-down. When major investors start unloading, retail investors are often caught off guard and get "cut." Speculative hype followed by dumping to trap retail investors is hard to defend against. Margin calls are even worse—during the shipping sector crash in 2021, stock prices plummeted and triggered margin calls, leading to a surge in selling pressure, and many retail investors couldn't get out in time. Technical breakdowns are also a cause—breaking below key support levels like the monthly or quarterly moving averages can trigger stop-loss selling, and a long black candle with high volume may signal major players offloading their positions.

By the way, the U.S. stock market is different from Taiwan's. They don't have limit-up or limit-down restrictions, but they do have circuit breakers. When the S&P 500 drops more than 7% or 13%, trading is paused for 15 minutes. If the decline reaches 20%, the market closes for the day. Individual stocks also have circuit breakers—if a stock's price surges or drops more than 5% within a short period, trading on that stock will be temporarily halted.

When encountering limit-up or limit-down stocks, the most important thing is to stay rational. The biggest mistake beginners make is blindly chasing high or selling low. Instead, you should first understand why the stock hit the limit-up or limit-down before deciding whether to enter. For example, if a stock hits the limit-down but the company's fundamentals are fine and it's just market sentiment dragging it down, it might rebound later. In such cases, the best strategy is to hold or add a small position. When seeing a limit-up, don't rush to buy; first check if there's any significant positive news and whether that news can sustain the stock's rise. If you feel it might not last, it's best to wait and see.

Another approach is to trade related stocks. When a stock hits the limit-up due to positive news, consider buying related upstream or downstream companies or similar stocks. For example, if TSMC hits the limit-up, other semiconductor stocks often move in tandem. Some Taiwanese stocks are also listed in the U.S., like TSMC, which can be bought on the U.S. stock market. If you're interested in investing, you can place orders through a foreign broker or overseas trading platform, which can be more convenient.