The true face of stock limit-ups and limit-downs: What to do when the price is locked?

First, Understand the Definitions of Limit Up and Limit Down

To navigate the stock market with ease, you must first understand two important concepts.

Limit Up refers to the situation where a stock’s price rises to the maximum limit set by regulatory authorities within a single trading day, after which it cannot continue to climb. For example, in the Taiwan stock market, this limit is usually set at 10% of the previous trading day’s closing price. If TSMC closed at NT$600 yesterday, the maximum price today would be NT$660—once this level is reached, the stock price is “frozen.”

Limit Down is the opposite concept, where a stock’s price drops to the lowest limit for the day and cannot continue to fall. Using TSMC as an example again, its lowest price today would be NT$540.

Visual Recognition: You Can Tell at a Glance by Looking at the Market

Experienced investors know that there are clear visual signals when a stock hits the limit up or limit down. The price movement chart will stay on a horizontal line, with no further fluctuations. In the Taiwan stock trading system, limit-up stocks are marked with a red background, while limit-down stocks are shown with a green background.

When observing buy and sell orders, the characteristics of limit-up stocks are very obvious: buy orders pile up heavily, while sell orders are almost nonexistent. This reflects a market consensus that is very optimistic, with buying interest far exceeding selling interest. Conversely, when a limit down occurs, sell orders are queued up, and buy orders are sparse.

Can You Trade During a Limit Up?

Many novice investors mistakenly believe that trading is impossible during a limit-up situation, which is incorrect. Trading is fully possible during a limit-up state, but the success rate depends on your trading direction.

If you want to place a buy order, since there are already many buyers queued at the limit-up price, your order may need to wait a long time to be filled, or it may not be filled at all during the day. However, if you place a sell order, due to high demand, your order is usually quickly matched and executed.

Current Trading Situation During a Limit Down

The situation is exactly the opposite during a limit down. At this time, buy orders can often be filled quickly because many sellers want to exit their positions. On the other hand, placing a sell order will encounter queueing issues, requiring you to wait for enough buyers to appear.

What Factors Trigger Limit Up?

Market good news is the primary driver of limit ups. When listed companies announce impressive quarterly revenues, significant earnings per share increases, or secure large orders (such as TSMC receiving major orders from Apple or NVIDIA), stock prices often hit the limit up. Policy positives also work—when green energy subsidies, electric vehicle industry support, and other policies are introduced, related stocks will see capital inflows.

Sector rotation in thematic trading is also significant. AI concept stocks frequently hit the limit up due to surging server demand, and biotech stocks are market favorites. During quarter-end earnings boosting periods, investment trusts and large investors often push up small- and medium-sized electronics stocks to boost performance, resulting in frequent limit-ups.

Technical breakthroughs can also trigger limit ups. When a stock price breaks through long-term consolidation zones with high trading volume, or when a high short interest causes a short squeeze, buying enthusiasm surges.

High concentration of chips can also lead to limit ups. When foreign investors and investment trusts continuously buy heavily, or when major players lock in small- and mid-cap stocks tightly, there may be no available shares to buy. A slight push can lock the stock at the limit up, making it difficult for retail investors to buy in.

Reasons Behind Limit Down

Panic caused by bad news is the most direct reason for limit downs. Earnings reports that reveal losses or declining gross margins, company scandals (such as financial fraud or executive involvement), or industry downturns can trigger a market sell-off.

Systemic risk impacts are also powerful. During the COVID-19 pandemic in 2020, many stocks hit the limit down directly. International stock market volatility can spill over—if US stocks plunge, TSMC’s ADRs may fall, dragging down Taiwan’s tech stocks to limit down.

Main players offloading and margin calls often catch retail investors off guard. Major players may first push the stock price higher to attract retail follow-on, then reverse course and sell, trapping chasing investors. Margin calls make it worse—during the shipping industry crash in 2021, falling stock prices triggered margin calls, increasing selling pressure, and many retail investors couldn’t escape in time.

Technical breakdowns can also directly cause limit downs. Breaking key support levels like the monthly or quarterly moving averages can trigger stop-loss selling. A sudden large black candle on the day often signals institutional dumping, with stop-loss orders flooding in, making a limit down imminent.

Different System Designs of Taiwan Stock Market and US Stock Market

Taiwan stocks use price limit systems, whereas the US stock market adopts a different approach—no limit up or limit down settings, but instead introduces circuit breakers.

The circuit breaker mechanism works as follows: when market volatility exceeds a safe threshold, trading is automatically halted to allow the market to cool down.

In the US, there are two levels:

Market-wide circuit breakers involve the entire market. If the S&P 500 drops more than 7%, trading is paused for 15 minutes; if it drops more than 13%, another 15-minute halt; if it hits a 20% decline, trading for the day is terminated.

Single-stock circuit breakers target individual stocks. If a stock’s price moves up or down more than 5% within 15 seconds, trading for that stock is temporarily halted, with duration depending on the stock type.

Practical Strategies When Encountering Limit Up or Limit Down

Overcome psychological biases and make rational decisions

The most common mistake among novice investors is chasing after stocks that hit the limit up or selling stocks that hit the limit down. The correct approach is to analyze deeply—why did this stock hit the limit up or down?

Suppose a stock hits the limit down, but the company’s fundamentals are intact, and the decline is purely due to market sentiment or short-term factors. In this case, a rebound opportunity may be ahead. Holding or adding a small position might be wiser.

When seeing a limit up, exercise restraint and avoid greed. First, confirm whether there are significant positive news supporting the move, and whether this momentum can sustain the stock price increase. If confidence is lacking, waiting is the best tactic.

Switch to related stocks or overseas trading

If a stock you favor hits the limit up due to positive news and you cannot buy it, consider shifting your focus to upstream or downstream industries or similar stocks. When TSMC hits the limit up, other semiconductor stocks often perform similarly.

Another approach is to look for overseas trading opportunities for the same company. TSMC is listed on US stock exchanges under the ticker TSM, and investors can trade via foreign brokers or through overseas trading accounts, offering greater flexibility.