A lockout limit is a predetermined price set by an exchange for a futures contract, which prevents trading above or below that price. It is set to minimize investor losses and can last for a single trading day or several successive days. This limit provides protection for investors and helps keep trading on the futures exchange balanced.
A lockout limit is a situation associated with the prices of a futures contract. When this type of limit occurs, the current trading price of the contract reaches a level equal to the limit price currently recognized by the exchange where the contract is traded. Once a lockout limit has been identified, trading within that exchange will exclude any bids above or below that lockout limit associated with that futures contract.
The key to creating a block limit situation is the limit price determined by the exchange. Most exchanges will use several criteria to set this type of predetermined price, including the financial stability of the underlying entity issuing the contract. Setting a limit price is actually to the benefit of investors, as it helps minimize the amount of losses investors can incur on futures contracts.
Typically, a blocking limit is only imposed for a single trading day. This means that if on Monday, the trading price of a futures contract jumped from just below the exchange’s cutoff price to slightly above that price, it wouldn’t be allowed to fall back below that cutoff price for the rest of the day. Similarly, if the trading price fell below the limit price set by the exchange, any further orders below that limit price would not be filled for the remainder of the trading day. Whether or not a freeze limit occurs on the next trading day will depend on how trading prices compare to the limit price associated with that futures contract. In extreme situations, a block limit situation may be recognized for several successive days, based on what happens with attempts to trade that contract on each of those days.
One benefit of a lock limit is that it creates a certain level of protection for investors trading futures contracts. Due to the level of risk associated with this type of investment, the possibility of incurring losses is significant. By establishing something of a limit price, a trade provides investors with yet another tool they can use to assess the feasibility of buying or selling the futures contract in question, a move which not only helps investors but also helps keep trading on the futures buoyant. exchange. and somewhat balanced.
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