Stock Limit Up and Limit Down Trading Guide: Master Investment Strategies for Extreme Market Fluctuations

One of the most eye-catching phenomena in the stock market is when stock prices suddenly hit a standstill or get stuck. Many investors, upon seeing the limit-up or limit-down boards, often fall into the trap of chasing highs and selling lows. But in reality, as long as you understand the mechanisms behind these phenomena, you can turn danger into opportunity.

Seeing Through the Essence of Limit-Up and Limit-Down Boards at a Glance

Limit-up board refers to when a stock’s price rises to the maximum allowed limit for the day and cannot go higher. Limit-down board is the opposite, indicating the stock’s price has fallen to the day’s minimum limit and cannot go lower.

In the Taiwan stock market, the daily price fluctuation limit for listed and OTC stocks is 10% of the previous day’s closing price. For example, if TSMC’s previous closing price was NT$600, the maximum price today can only rise to NT$660 (limit-up price), and the minimum to NT$540 (limit-down price).

Quickly Identifying Limit-Up and Limit-Down Boards from the Market

The most intuitive way to identify them is by observing the trend chart—if the stock price trend becomes a straight line, no longer fluctuating, it has hit the limit-up or limit-down.

On the Taiwan trading platform, visual identification is also simple:

• Red background: indicates a limit-up stock
• Green background: indicates a limit-down stock

From the order book, during a limit-up:

• Buy orders are fully filled, and sell orders are sparse (more buyers than sellers) During a limit-down:
• Sell orders are dense, and buy orders are few (more sellers than buyers)

Trading Is Still Possible During Limit-Up and Limit-Down Periods

Many people mistakenly believe that trading stops once the limit-up or limit-down is reached. In fact—trading can occur at any time.

When a stock hits the limit-up:

• Placing buy orders does not necessarily mean immediate execution, as many buy orders are waiting ahead
• Placing sell orders is usually executed immediately due to ample buying interest

When a stock hits the limit-down:

• Placing buy orders is usually executed immediately due to abundant selling
• Placing sell orders requires queuing, as there are many sell orders

Common Causes Triggering Limit-Up and Limit-Down Boards

Stock limit-up usually results from the following factors:

1. Major positive news catalysts Companies releasing impressive financial reports (quarterly revenue surge, record-high EPS), securing large orders (e.g., TSMC receiving big orders from Apple or NVIDIA), or government policies favoring industries (green energy subsidies, electric vehicle support policies) can trigger market capital inflows, pushing stock prices to the limit-up.

2. Market hot topic rotations For example, AI concept stocks soaring due to increased server demand, biotech stocks becoming the focus of speculation, or during month-end accounting periods, institutional and main force funds aggressively buy mid-sized electronics stocks like IC design companies to boost performance. These stocks often directly hit the limit-up.

3. Technical breakout signals Prices breaking through long-term consolidation zones with increased volume, or high short sale balances triggering short squeeze conditions, attract chasing buy orders, ultimately locking the stock at the limit-up.

4. Control by large investors When foreign investors or institutional investors continuously buy heavily, and main players control the stock supply, the circulating stocks become severely limited, making it easy to hit the limit-up with a single push. Retail investors often find it difficult to buy.

Stock limit-down usually results from the following factors:

1. Negative news impacting market sentiment Earnings losses widening, gross margin declines, company scandals involving financial fraud or executives, or industry entering recession, all cause heavy selling pressure, making it hard to escape the limit-down.

2. Systemic risk causing panic selling During the COVID-19 outbreak in 2020, many stocks directly hit the limit-down; during the US stock market crash, TSMC ADRs plummeted, dragging down the entire Taiwan tech sector to limit-down.

3. Main players offloading and margin calls Main investors dumping stocks at high prices after speculation, or margin traders forced to sell due to falling prices triggering margin calls, lead to large sell-offs, as seen during the 2021 shipping stock crash.

4. Breaking key technical support levels Prices falling below critical technical supports like the monthly or quarterly moving averages, triggering stop-loss selling; or sudden large-volume black candlesticks indicating main players offloading, causing sell pressure to explode into limit-down.

Comparison of Limit-Up and Limit-Down Systems in Global Stock Markets

The control methods for volatility differ sharply between Taiwan and the US.

Taiwan stock market employs limit-up and limit-down systems: restricting daily price fluctuations to 10%, with stocks freezing at the limit price once reached, preventing further movement.

The US stock market has no limit-up or limit-down but uses circuit breakers: when stock prices fluctuate beyond preset ranges, trading is automatically paused for a period to cool down the market.

• Market circuit breaker: When the S&P 500 drops more than 7% or 13%, the entire market halts trading for 15 minutes; a 20% decline triggers a full market close.
• Single stock circuit breaker: When an individual stock moves more than 5% within 15 seconds, trading is paused, with duration depending on the stock type.

Practical Strategies for Investors Facing Limit-Up and Limit-Down Boards

Strategy 1: Rational analysis, avoid blindly chasing highs or selling lows

New investors tend to make the mistake of following the crowd to buy at the limit-up or sell at the limit-down. The correct approach is to first understand: Why did this stock hit the limit-up or limit-down? Can this reason persist?

For example, if a stock hits the limit-down but the company’s fundamentals are sound, and the decline is due to short-term market sentiment or external factors, a rebound is likely. In such cases, holding or gradually building positions is better than panic selling.

Similarly, when seeing a limit-up, resist the impulse to chase. First confirm whether there are substantial positive catalysts supporting further price increases. If the positive news is insufficient to sustain upward momentum, it’s wiser to wait and see.

Strategy 2: Trade related stocks or seek alternative targets

When a stock hits the limit-up due to positive news, related upstream or downstream companies or similar stocks often follow suit. For example, when TSMC hits the limit-up, other semiconductor stocks tend to strengthen simultaneously. Investors can consider deploying funds into these related stocks.

Additionally, many Taiwanese listed companies are also listed in the US, such as TSMC (TSM). To participate in these stocks’ upward trends, investors can use cross-trading or overseas brokerages, which offer more flexibility and convenience.

Mastering the trading rules and trigger mechanisms of limit-up and limit-down boards allows you to find rational investment opportunities amid extreme market volatility.