A lock limit occurs when the trading price of a futures contract reaches the limit price recognized by the exchange, excluding any offers above or below that limit. It provides protection for investors and helps to minimize potential losses. The limit price is determined by the exchange and is based on various criteria. A lock limit is usually imposed for a single trading day, but in extreme situations, it can last for several days.
A lock limit is a situation associated with the prices of a futures contract. When this type of limit occurs, the current trading price for the contract reaches a level that is equal to the limit price currently recognized by the exchange on which the contract is traded. Once a lock limit has been identified, trading activity within that exchange will exclude any offers that are higher or lower than the lock limit associated with that futures contract.
The key to creating a lock limit situation is the limit price determined by the exchange. Most exchanges will use various criteria to set this type of default 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 to minimize the amount of loss that investors may incur on futures contracts.
Usually, a lock limit is imposed only for a single trading day. This means that if the trading price in a futures contract jumped from just below the exchange’s limit price to slightly above that price on a Monday, it will not be allowed to fall back below that limit price during the trading period. rest of the day. In the same way, if the trading price slips below the limit price set by the exchange, any other orders that are below that limit price will not be executed for the rest of the trading day. Whether or not a lock 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 blackout limit situation may be recognized for several successive days, depending on what happens to the trade attempts for that contract on each of those days.
One of the benefits of a lock limit is that it creates some level of protection for investors who are involved in trading futures contracts. Due to the level of risk associated with this type of investment, the potential for sustaining losses is significant. By setting some kind of limit price, an exchange provides investors with one more tool to assess the feasibility of buying or selling the futures contract in question, a move that not only helps investors but also helps keep the trade in quick exchange. and somewhat balanced
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