What to do when stocks hit the daily limit up or down? A comprehensive guide for investors on how to respond to extreme market volatility

The most loved and hated phenomenon among investors in the stock market is none other than stock limit up and limit down. These two extreme market conditions often represent the peak of market sentiment, but they also leave many novice investors at a loss. The key question is: when a stock hits the limit up or limit down, can we still buy and sell? How should we operate in such situations?

What should be the first reaction of investors when facing limit up or limit down?

Most people’s first reaction when seeing a stock hit the limit up is to buy; when seeing a limit down, they rush to sell. But this is precisely the easiest way to fall into a trap.

Rational judgment is key. First, understand why this stock is hitting the limit up or down before deciding on a strategy. For example, a stock hits the limit down, but the company itself has no issues; it’s just dragged down by market sentiment or short-term factors, so it’s likely to rebound later. The best approach then is to hold or add a small position.

Conversely, when seeing a limit up, don’t rush. First, confirm whether there are real substantial positive factors supporting the stock’s continued rise. If the positive news is limited, waiting and observing is the wisest choice.

What are limit up and limit down? The simplest explanation

Limit up means the stock price has risen to the maximum allowed for the day, hitting the ceiling; limit down means the stock price has fallen to the lowest limit for the day, hitting the floor.

Taking Taiwan’s stock market as an example, the daily price change limit for listed and OTC stocks cannot exceed 10% of the previous day’s closing price. For TSMC, if yesterday’s close was 600 NT dollars, today’s maximum is 660 NT dollars, and the minimum is 540 NT dollars.

On the trading screen, limit up stocks are marked with a red background, and limit down stocks with a green background, making it easy to identify at a glance.

During limit up and limit down, you can still trade normally

Many people mistakenly believe that trading is impossible when stocks hit the limit up or down, which is a common misconception.

At limit up: You can still place buy or sell orders. However, note that placing a buy order doesn’t necessarily mean it will be executed immediately, as there are already many people waiting to buy. But if you place a sell order, because many want to buy, it will usually be executed instantly.

At limit down: Trading is also possible. Placing a buy order will generally be filled immediately (since many want to sell), but placing a sell order may require waiting in line.

Simply put, selling at limit up is easy, buying is hard; buying at limit down is easy, selling is hard.

What causes a stock to hit the limit up?

Typical reasons for limit up include:

Positive news driving the rally — The company reports excellent financial results (quarterly revenue surges, EPS significantly increases) or receives large orders. TSMC often hits the limit up due to major orders from Apple or NVIDIA; policy incentives also trigger capital inflows, such as government subsidies for green energy or electric vehicle industries, instantly pushing related stocks to the limit up.

Market capital chasing hot topics — AI concept stocks surge to limit up due to booming server demand; biotech stocks are frequent favorites; during quarter-end performance boosting, fund managers and major players love to aggressively buy small and medium electronic stocks like IC design companies to boost performance, and a little spark can send them straight to the limit up.

Strong technical breakout — The stock price breaks out of a long consolidation zone with high volume, or high short interest triggers short squeeze, attracting chasing buyers and locking in the price.

Main force locking chips — When foreign investors and funds continuously buy heavily, or major players tightly lock the chips of small and medium stocks, there are virtually no stocks available to sell in the market. Any push can lock the stock at the limit up, making it difficult for retail investors to buy.

How is a stock formed at limit down?

Negative news shocks — Disappointing earnings (widening losses, declining gross margin), company scandals (financial fraud, executive involvement), or industry downturns cause panic selling, leading directly to limit down.

Market panic sentiment — Systemic risks (such as the COVID-19 pandemic in 2020) cause a large number of stocks to hit the limit down; international stock market crashes also transmit the effect. For example, when US stocks plunge, TSMC’s ADR leads the decline, and Taiwanese tech stocks follow with limit downs.

Main players offloading — After hype and pushing prices higher, they start to sell off, trapping retail investors; margin calls are even worse. For instance, in 2021, shipping stocks collapsed, and when their prices fell, margin calls triggered selling pressure, leaving retail investors no time to escape.

Technical breakdown — Falling below key support levels like the monthly or quarterly moving averages triggers stop-loss selling; a sudden high-volume long black candle is a clear signal of main players offloading, immediately causing a limit down.

Taiwan stocks have limit up and limit down, what about US stocks?

Interestingly, US stocks do not have limit up or limit down mechanisms. Instead, they have “circuit breakers” (also called automatic trading halts).

When stock prices fluctuate beyond certain thresholds, the system automatically pauses trading, giving the market a breather, and resumes after a cooling-off period.

US circuit breakers are divided into two types:

Market-wide circuit breaker — When the S&P 500 drops more than 7% or 13%, the entire market halts for 15 minutes. If the decline reaches 20%, trading is halted for the rest of the day.

Single stock circuit breaker — When an individual stock’s price moves more than 5% within a short period (e.g., 15 seconds), trading on that stock is temporarily halted. Different stocks have different standards and durations for halts.

Compared to Taiwan’s approach of limiting daily price changes to control volatility, the US uses trading halts to cool down the market.

How should investors operate when encountering limit up or limit down?

Strategy 1: Trade related stocks — When a certain stock hits the limit up due to positive news, consider buying related upstream or downstream companies or similar stocks. For example, when TSMC hits the limit up, other semiconductor stocks often follow suit.

Strategy 2: Invest through US markets — Some Taiwanese stocks are also listed in the US, such as TSMC(TSM). You can use overseas brokers or proxy trading to operate more conveniently.

Strategy 3: Assess the sustainability of positive/negative factors — Whether a stock can continue to rise after hitting the limit up depends on whether the positive factors have long-term driving power. Conversely, after hitting the limit down, if fundamentals remain intact, it could be a low-entry opportunity.

Finally, remember that whether it’s limit up or limit down, blindly chasing highs or selling lows is always the start of losing money. Do more research, make rational judgments, and control risks—that’s the right way to invest.

Start your trading journey in three steps:

1. Register — Fill in your information and submit your application
2. Deposit — Quickly fund your account through various methods
3. Trade — Discover opportunities and place orders swiftly