A limit move is a restriction on the maximum increase or decrease in the trading price of a security or derivative in a trading session. It prevents price bubbles and precipitous declines, and ensures prices stay within a specified range. When the limit is reached, trading may be stopped, allowing the security or derivative to cool before resuming. Having a daily trading limit can create stability in a volatile market. Information about any limit movement policy is available in an exchange’s rulebook.
A limit move is a restriction on the maximum increase or decrease in the trading price of a security or derivative in a trading session. This is designed to prevent price bubbles caused by speculative trading activities, as well as precipitous declines associated with investor panic. It is set by an exchange, which considers current market conditions and the history of a given security when determining the appropriate limits to set. The base price and definition of a “session” may depend on the exchange; You could, for example, extend a limit move over an entire trading day and base the price on the previous day’s closing price.
Also known as a price swing maximum or price cap, this ensures that prices stay within a specified range. For example, a commodity exchange might decide to put a movement limit on wheat at $0.50 US dollars (USD). If wheat is trading at $4.50 USD, it can fall as low as $4.00 USD or go as high as $5.00 USD, but you cannot trade at values outside of this range. The limit move keeps the price stable and prevents a flurry of speculative trading activity that could artificially inflate or devalue the commodity.
When the limit is reached, the merchants reach a limit lock state. Trading may be stopped because there is a mismatch in terms of buyers and sellers and because the price cannot go any further, people may be reluctant to make the first move. In some cases, this may be desirable, as it allows a security or derivative to cool before resuming trading. The lock limit can also create problems with a market resulting in slow performance and a bad day. Policymakers on an exchange need to carefully balance risks when deciding on a limit move.
Having a daily trading limit can create some stability in a volatile market. Traders who work below or above the limit know that prices cannot go above that specific point that day; This can slow down the trade and give it a chance to stabilize. When trading reopens for the next session, people can push the limits again to see if trading in that security or derivative is still as strong. They avoid large losses that could be created with limits to keep prices in check and within reasonable limits.
Information about any limit movement policy is available in an exchange’s rulebook. This document reviews the policies for trading, including the rules people must follow when participating in exchanges and preparing to join the exchange. Some exchanges set dress codes and standards of behavior that people must adhere to in order to trade on the floor, in addition to legal and ethical policies designed to keep the exchange functional.
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