Can you really buy stocks that hit the daily limit? An article covering the trading rules and strategies for limit-up and limit-down stocks

The Fundamental Difference Between Limit-Up and Limit-Down Stocks

In the stock market, it is common to see certain stocks suddenly freeze in price, which are known as limit-up stocks and limit-down phenomena. From a market perspective, a limit-up indicates overwhelming buying pressure, with almost no sellers willing to sell; whereas a limit-down reflects panic selling, with a severe lack of buying interest.

Taking Taiwan’s stock market rules as an example, the daily price change limit is set at 10% of the previous trading day’s closing price. For instance, if TSMC closed at 600 NT dollars yesterday, the highest price today reaching 660 NT dollars will trigger a limit-up; the lowest dropping to 540 NT dollars is a limit-down.

Trading Realities During Limit-Up and Limit-Down Events

Many investors mistakenly believe that limit-up stocks cannot be traded, but this is not true. Limit-up stocks can be bought and sold at any time, but the difficulty in executing trades varies greatly. To buy a limit-up stock, you need to place an order behind many waiting buyers, which may take a long time to fill; conversely, placing a sell order often results in immediate execution because buyers are extremely eager to buy in.

The situation for limit-down stocks is the opposite—buy orders can be filled quickly, but sell orders tend to accumulate, requiring queueing. This asymmetric trading characteristic is a key feature during limit-up and limit-down events.

Visually on the trading screen, Taiwan stocks are marked with red for limit-up stocks and green for limit-down stocks, allowing investors to identify them at a glance.

Market Forces Driving Limit-Up Stocks Higher

The appearance of limit-up stocks is often driven by specific catalysts:

Policy and performance incentives are the most direct triggers. When listed companies announce impressive quarterly reports, expand gross margins, or secure large orders (such as TSMC receiving orders from Apple or NVIDIA), buying interest often surges rapidly. Government support policies like green energy subsidies or electric vehicle incentives also stimulate concentrated limit-up movements in industry stocks.

Theme hype also plays a significant role. Biotech stocks and AI concept stocks frequently hit limit-up due to market capital chasing these themes; at the end of quarters, major funds often target small and medium-sized electronics stocks to boost performance.

Technical turning points can also trigger limit-ups. When stock prices break through long-term consolidation zones with increased volume, or when high short interest triggers short covering, these can attract chasing buyers and lock in the price.

Shareholding control is the most decisive factor. When foreign investors, investment trusts, or major players continuously buy large amounts or deliberately lock in small-cap stocks, the circulating shares become scarce, making it easy to push stocks to limit-up, while retail investors find it difficult to enter.

Sources of Selling Pressure Behind Limit-Down Stocks

Conversely, limit-down stocks reflect market panic:

Negative news impacts are the primary cause—financial report losses, collapsing gross margins, financial fraud, management scandals, or an industry entering recession cycles can trigger a wave of selling.

Systemic risks are even more powerful. In 2020, the COVID-19 outbreak caused a global stock market crash, with countless stocks hitting limit-down; a sharp decline in US stocks can also impact Taiwan stocks. For example, a plunge in TSMC’s ADR can lead to a sell-off in Taiwanese tech stocks, hitting limit-down.

Major players offloading is the most unpredictable for retail investors. After hype-driven high positions, dumping shares can trap retail investors; margin calls can further worsen the situation—during the shipping sector crash in 2021, retail investors with margin found it impossible to escape.

Technical breakdowns are also warning signs. Falling below key support levels like the monthly or quarterly moving averages can trigger stop-loss selling, or sudden high-volume black candles may signal major players offloading, greatly increasing the chance of hitting limit-down afterward.

Major Market Volatility Control Measures Globally

It is worth noting that the US stock market does not have limit-up or limit-down restrictions but instead employs circuit breaker mechanisms. When the S&P 500 drops more than 7% in a day, trading is temporarily halted for 15 minutes; a decline of 13% results in another 15-minute halt; if it falls 20%, the market closes for the day. On individual stocks, a price change exceeding 5% within 15 seconds can trigger a brief trading suspension.

Practical Strategies When Facing Limit-Up Stocks

First Priority: Rational Judgment of Fundamentals

The most common mistake among novice investors is blindly chasing high or selling low. When encountering a limit-up stock, always ask: Why is this stock limit-up? Can the reason sustain the stock price?

If a limit-down stock is fundamentally sound but dragged down by market sentiment or short-term negative news, there is usually a rebound opportunity. Holding or small-scale positioning is a better strategy. Conversely, do not rush to chase a limit-up; verify whether the positive news is substantial. If in doubt, it’s safest to wait and observe.

Second Strategy: Trading Related Stocks

When a single stock hits limit-up, consider shifting to its upstream or downstream suppliers or industry peers. For example, a TSMC limit-up often boosts the entire semiconductor sector. Additionally, many Taiwanese listed companies also have ADRs traded in the US (such as TSMC TSM), which can be more conveniently traded via foreign brokers or through proxy trading, avoiding the limit-up restrictions of a single market.

Third Reminder: Manage Risk Expectations

Limit-up stocks often face profit-taking pressure after a short-term surge, and chasing high can turn into a trap for retail investors. For limit-down stocks, if the company’s fundamentals do not improve, the rebound may be only an illusion. Investment decisions should be based on long-term logic rather than short-term volatility.