DEFINITION of Limit up / limit down
Limit up and limit down are the maximum number a commodity future may increase or decrease in any trading day.
WHAT IT IS IN ESSENCE
Their purpose is to protect futures contracts from surprising occasions that may cause major moves in its underlying commodity’s price. Without them, there is a risk that a futures contract price will reach a groundless value because of market panic.
They can cause a discrepancy between a market’s price and the price reflected in its corresponding futures contract. If a market makes a major move in a very short amount of time, the contract price may reach its ups or downs for several days before it matches the market’s price once more.
HOW TO USE
This is the maximum amount by which the price of a commodity futures contract may advance in one trading day.
It’s the top price a contract can be traded before an exchange would stop its trading.
The exchange sets this highest border at what it thinks would be a price that would cause manipulation or volatility. Of course, the price varies from commodity to commodity.
Some markets will allow the contracts to continue trading even if the price moves away from the day’s limit.
The opposite of limit up. This is the maximum amount by which the price of a commodity futures contract may decrease in one trading day. So it’s the lowest sum a commodity can be traded before an exchange stops trading.
The exchange sets the lowest line at what it thinks would be a low price that would cause volatility or manipulation. The lowest price varies from commodity to commodity.
If the contract prices do go higher away from their price down, exchanges will allow trading to resume.