What is a Daily Trading Limit?
A daily trading limit is the maximum gain or loss allowed on a derivative or currency in one trading day.
How Does a Daily Trading Limit Work?
For example, let's say that a forward contract on Company XYZ stock has a trading limit of X. Accordingly, if the price change exceeds X during the trading day, a 'locked market' occurs, and trading in the contract halts.
China has a daily trading limit of 0.5% on its national currency, meaning that if the price changes more than 0.5% in either direction during the day, the trading is halted until the next day.
Why Does a Daily Trading Limit Matter?
Daily trading limits prevent extreme volatility or price manipulation in the markets. If trading approaches the upper level of daily trading limit, we say that the security had an 'up limit' day. Likewise, if trading approaches the lower level of the daily trading limit, we say the security had a 'down limit' day.
