What is a limit-up? Can stocks still be traded when they hit the limit-up or limit-down? Essential trading rules every investor must know

In the stock market, the limit-up and limit-down are phenomena every trader will encounter. When stock prices hit the limit-up or limit-down, trading restrictions are imposed, which often confuses many beginners—Can you still buy or sell at the limit-up? Why are prices locked? This article will help you understand the mechanisms behind these phenomena.

What are limit-up and limit-down in stocks? Why do these phenomena occur in the market?

Limit-up refers to the maximum price increase set by regulatory authorities within a day, causing the stock price to be frozen and unable to rise further. Conversely, limit-down is when the stock price drops to the daily lower limit, preventing further decline.

For example, in Taiwan’s stock market, the daily price change limit for listed and OTC stocks is 10% of the previous day’s closing price. If a stock closed at NT$100 yesterday, today the maximum price it can reach is NT$110 (limit-up), and the minimum NT$90 (limit-down).

How to quickly identify limit-up and limit-down?

When you open stock trading software, limit-up and limit-down are easy to recognize:

Features of limit-up: The price trend chart shows a completely horizontal line, as the price is frozen and cannot change. On the Taiwan stock market, stocks at limit-up are marked with a red background block, with buy orders fully queued and almost no sell orders, indicating that many investors want to buy more than sell.

Features of limit-down: Similarly, a flat line is shown, marked with a green background. At this point, sell orders are queued, buy orders are scarce, reflecting that the market’s selling pressure exceeds buying interest.

Can you buy at the limit-up? Can you sell at the limit-down?

Trading rules at limit-up: Limit-up is not a forbidden zone—you can place orders. However, if you place a buy order, you may need to wait in line because many others are queued at the limit-up price. On the other hand, if you place a sell order, it will likely be executed immediately because there are many buyers.

Trading rules at limit-down: Limit-down also allows trading. If you place a buy order, it will be filled quickly due to abundant sellers. But if you place a sell order, you’ll need to wait in line because sell orders are piled up.

In simple terms, it’s better to sell at limit-up and buy at limit-down—provided your prices are accepted by the market.

Five major factors driving the formation of limit-up in stocks

1. Major positive news triggers buying frenzy

When a company releases impressive financial reports (quarterly revenue surges, EPS doubles) or secures significant orders, the market reacts immediately. For example, TSMC receiving large orders from Apple and NVIDIA often pushes the stock directly to limit-up. Policy-related good news, like government subsidies for green energy or electric vehicle industries, can also trigger collective buying, causing related stocks to hit limit-up instantly.

2. Continuous hype around hot topics

When the market focuses on a particular sector, capital floods in. AI concept stocks surge to limit-up due to server demand, biotech stocks are frequent favorites for speculation. During quarter-end performance boosting, fund managers and main players often push small- and medium-sized electronics stocks, like IC design firms, to limit-up to boost performance.

3. Technical breakthroughs spark chasing

When stock prices break out of long-term consolidation zones with high trading volume, or when high short-term borrowings trigger short squeeze scenarios, many chasing buy orders flood in, ultimately locking the stock at limit-up.

4. High concentration of chips

When large investors tightly control the chips, stocks become scarce in the market. Any slight push can hit limit-up. Continuous buying by foreign investors and funds, or main players controlling small- and mid-cap stocks, often cause this phenomenon.

5. Anticipation of turning points driving rebounds

When struggling companies show signs of turnaround or earnings are expected to improve, the market may respond with a rebound and hit limit-up as a reflection of positive expectations.

Four main reasons for limit-down in stocks

1. Financial pitfalls and company risks

When listed companies suddenly report larger losses, sharp declines in gross profit margins, or scandals like financial fraud or executive misconduct, panic selling can drive the stock to limit-down. Entire industries in recession also drag related stocks down.

2. Spread of systemic risks

Major black swan events, such as the COVID-19 pandemic outbreak, cause a batch of stocks to hit limit-down. Crashes in international markets also transmit to Taiwan stocks; for example, when US stocks plunge, TSMC’s ADRs are hit first, followed by a tech stock sell-off in Taiwan.

3. Main players offloading and margin calls

Main investors sell off large amounts after pushing prices higher, trapping retail investors. More severely, margin investors triggering margin calls cause selling pressure to surge—like the shipping stocks crash in 2021, when many wanted to escape but couldn’t.

4. Severe technical breakdowns

When stock prices break below key support levels like the monthly or quarterly moving averages, triggering chain reaction stop-loss sales, or gap down with high volume, it often signals main players offloading, and selling pressure can easily cause limit-down.

Market control mechanisms: Taiwan vs US stock markets

Taiwan’s stock market uses a limit-up system, with a daily price change limit of 10%, and prices are frozen once the limit is reached.

The US stock market is different. It has no limit-up restrictions but employs circuit breakers (automatic trading halts) to prevent market chaos.

US circuit breaker types:

• Market-wide circuit breakers: When the S&P 500 drops more than 7%, trading halts for 15 minutes; if it drops over 13%, another 15-minute halt; at 20% decline, the market closes for the day.
• Single-stock circuit breakers: When an individual stock’s price moves more than 5% within 15 seconds, trading is temporarily halted. The duration depends on the stock type.

Practical strategies for investors facing limit-up

Strategy 1: Rational analysis, avoid blindly chasing

The most common mistake at limit-up is chasing the high. The correct approach is to ask: Why did it hit limit-up? Can this factor sustain the upward momentum?

If a stock hits limit-down but has solid fundamentals and is only dragged down by short-term sentiment, it may rebound later. In such cases, consider holding or gradually building positions.

When encountering a limit-up, stay calm. Confirm whether there are substantial positive catalysts. If the rally seems unsustainable, it’s best to wait and watch.

Strategy 2: Shift to related or overseas markets

When a stock hits limit-up due to positive news, consider buying related upstream or downstream industries or similar stocks. For example, when TSMC hits limit-up, other semiconductor companies often move in tandem.

Many Taiwanese listed companies are also traded on US exchanges, such as TSMC(TSM), which can be directly purchased on US markets. Using overseas brokers or proxy services makes trading more flexible and avoids domestic market restrictions.

Overall, limit-up and limit-down are extreme market volatility indicators. Investors need to understand their formation mechanisms, analyze the underlying reasons, and make informed trading decisions rather than being driven solely by market emotions.