Can you still trade when stocks hit the daily limit up or down? Essential trading rules and response guides investors must know

Don’t rush to chase highs or sell lows! First, understand what limit-up and limit-down really mean

Many beginners get panicked when they see a stock hit the limit-up or limit-down, unsure whether to buy or hold off. The key is to understand the significance behind these phenomena to make correct decisions.

Let’s start with the basic concepts. Limit-up means the stock price has risen to the maximum allowable price for the day, and cannot go higher; limit-down is the opposite — the stock has fallen to the lowest allowable price for the day, and cannot drop further. For example, in Taiwan’s stock market, the daily price change limit for listed and OTC stocks is 10% of the previous trading day’s closing price. If TSMC closed at NT$600 yesterday, the limit-up price today is NT$660, and the limit-down price is NT$540.

How can I identify limit-up or limit-down on the trading screen?

When you see a stock’s price chart become a straight line with almost no fluctuation, it indicates the stock has hit the limit-up or limit-down. On the Taiwan stock trading interface, limit-up stocks are marked with a red background, while limit-down stocks are shown with a green background, making it easy to distinguish.

You can also observe from the order book data. At limit-up, buy orders pile up, but sell orders are almost nonexistent because demand far exceeds supply. Conversely, at limit-down, sell orders are abundant, but buy orders are scarce.

Can I still place orders during limit-up or limit-down?

The answer is: Yes, you can trade, but it depends on your direction and luck.

During limit-up:

• If you want to place a buy order, it may not be filled immediately because there are already many buyers queued at the limit-up price.
• If you want to place a sell order, it can usually be executed quickly since buy-side strength is dominant.

During limit-down:

• If you want to buy, it can often be filled quickly due to heavy selling pressure.
• If you want to sell, you might need to wait in line because the limit-down price has a mountain of sell orders.

The important point is that limit-up and limit-down do not freeze trading. The order rules are the same as usual; only the speed of execution depends on supply and demand.

Why do stocks hit limit-up? Common driving factors

A sudden limit-up usually has underlying reasons. The most common drivers include:

Positive news releases — The company reports excellent quarterly earnings (significant growth in revenue or EPS), secures large orders (like TSMC winning new orders from Apple or NVIDIA), or the government announces industry-friendly policies (such as green energy subsidies or EV support plans). Market funds rush into related stocks, pushing them directly to the limit-up.

Hot sector speculation — Market funds love chasing trending concepts. AI-related stocks surge to limit-up due to soaring server demand, biotech stocks are frequent favorites. During quarter-end performance boosts, funds and major players often aggressively buy small- and mid-cap electronics stocks like IC design firms to boost performance, often igniting a quick surge to limit-up.

Technical strength — The stock price breaks out of long-term consolidation zones with increased volume, or high short-term borrowings (margin debt) trigger short squeezes, attracting chasing buyers and locking in the price.

Major institutional control — Foreign investors and funds continuously buy large amounts, or major players lock in chips of small- and mid-cap stocks, leaving little supply in the market. Any buying pressure can push the stock to limit-up, making it hard for retail investors to buy.

Why do stocks hit limit-down? Signals of potential crisis

Conversely, limit-down usually reflects market panic and risk:

Negative news shocks — Disappointing earnings (wider losses, declining gross margins), company crises (financial fraud, executive scandals), or industry downturns lead to a surge in selling pressure, making it hard for the stock to avoid limit-down.

Overall market sentiment deterioration — Systemic risks (like the COVID-19 pandemic in 2020) cause many stocks to plummet to limit-down. International market crashes also have spillover effects; for example, a sharp drop in US stocks can drag Taiwan tech stocks to limit-down.

Major players offloading and margin calls — Major investors start selling after pushing prices higher, trapping retail investors; even worse, margin calls can trigger forced liquidations, as seen during the 2021 shipping stock crash when many retail investors were forced to close positions.

Technical breakdowns — Falling below key support levels like the monthly or quarterly moving averages can trigger stop-loss selling, or sudden high-volume black candles (possible signals of major players offloading), leading to limit-down.

Differences between Taiwan stocks and US stocks: trading restrictions

Taiwan stocks have limit-up and limit-down mechanisms, but US stocks operate differently. The US uses circuit breaker mechanisms (also called automatic trading halts). When stock prices fluctuate beyond certain thresholds, trading is temporarily paused to allow the market to cool down before resuming.

US market circuit breaker rules:

• When the S&P 500 drops more than 7%, trading halts for 15 minutes
• If it drops 13%, another 15-minute halt
• If it drops 20%, trading is halted for the rest of the day

US individual stock circuit breakers:

• If a single stock moves more than 5% within 15 seconds, trading is temporarily halted
• The duration of halts and thresholds vary depending on the stock type

What should investors do when encountering limit-up or limit-down?

Step 1: Stay calm and avoid impulsive actions

Beginners often make the mistake of chasing high or selling low. Seeing a limit-up might tempt you to buy immediately; a limit-down might make you want to sell in panic. The correct approach is to first understand why the stock hit the limit-up or limit-down.

If a stock hits limit-down but the company’s fundamentals are sound, and the decline is driven by market sentiment or short-term factors, it may rebound later. In such cases, the best strategy is to hold or add small positions.

Conversely, when a stock hits limit-up, don’t rush to buy. First, verify if there are solid positive reasons supporting the move, and whether these can sustain the rally. If the positive news is insufficient or unsustainable, waiting and observing is the best approach.

Step 2: Shift focus to related stocks or overseas markets

When a stock hits limit-up due to positive news, consider buying related upstream or downstream companies, or stocks in the same industry. For example, when TSMC hits limit-up, other semiconductor stocks often follow suit.

Additionally, many Taiwanese listed companies are also traded on US exchanges. TSMC (TSM) is a typical example, accessible via foreign broker accounts or overseas brokers. This approach helps diversify risk and offers more flexible trading options.

( Step 3: Develop risk management habits

Whether at limit-up or limit-down, always operate with discipline. Set clear entry, exit, and stop-loss points, and avoid being swayed by market emotions. In the long run, rational decision-making far outweighs chasing trends blindly.