Recently, many people are panicking about the sharp fluctuations in the stock market. In fact, there is a mechanism behind it that is at work—the U.S. stock market circuit breaker system. Today, I want to talk with everyone about how this actually operates.

Simply put, the U.S. stock market circuit breaker system is like a circuit breaker in an electrical circuit. When market sentiment overreacts and stock prices swing sharply, this mechanism pauses trading, giving investors a chance to calm down and think things through. To put it another way, it’s like you get too absorbed in a horror movie and your heart can’t take it anymore—your system automatically hits the pause button, giving you 15 minutes to rest and regain your composure before continuing.

The U.S. stock market circuit breaker system has three levels. The first level is when the S&P 500 index falls by 7%; once triggered, trading is paused for 15 minutes. The second level is when it declines to 13%, triggering another 15-minute pause. The third level is when it drops by 20%; trading stops for the entire day. It’s worth noting that if a circuit breaker is triggered after 3:25 PM in the afternoon, trading will not be paused unless the third level is reached.

Why is this mechanism in place? Mainly to prevent investors from reacting excessively emotionally. In 2020, we experienced four circuit breakers. Warren Buffett has only seen five in his lifetime, yet in a single year we witnessed most of them ourselves. At that time, the COVID-19 pandemic broke out, along with a steep plunge in oil prices, and the market fell into panic—everyone was frantically selling. The role of the circuit breaker system then was to hit the pause button and give the market a chance to think rationally again.

However, this mechanism also has a double-edged nature. On the one hand, it can indeed ease market sentiment and prevent price distortions. On the other hand, some investors become even more anxious when they see the market approaching the circuit breaker levels—worried that once triggered they won’t be able to sell, which ends up intensifying volatility.

Historically, the most famous example is Black Monday in 1987, when the Dow Jones Industrial Average fell by 22.61%. It was that crash that prompted regulators to establish the U.S. stock market circuit breaker system. After that, during the 1997 Asian financial crisis, it was triggered once; and during the COVID-19 pandemic in 2020, it was triggered four times in succession.

If the U.S. stock market circuit breaker happens again in the future, my advice is not to be too alarmed. Follow a strategy of keeping cash king, ensuring the safety of your principal and maintaining liquidity. When market volatility is intense, good investment opportunities are actually harder to come by. Instead of acting blindly, it’s better to build a defense and save your firepower for long-term investing. After all, the purpose of the circuit breaker system is to make the market more stable and give us time to make more rational decisions.