What is a Daily Trading Limit?

It is the highest and lowest limit of the price range within which the price of a derivative contract (such as an options or futures contract) is allowed to fluctuate in a trading session. Once the limit is reached that particular derivative cannot be traded on that day for a higher or lower price These limits are imposed for safeguarding the interests of the investors against market manipulation and volatility.

How Does a Daily Trading Limit Work?

The derivative markets contain a high level of leverage; thus, these limits are in place for protecting the investors from any extremities. This is also known as the fluctuation price limits. Once the limit is reached, the market is called the locked market. That means the market for that derivative is locked for the day. If the trading limit reaches the highest point on a day, it is the up-limit day for the derivative. Similarly, if it reaches the lowest level, then it is the down-limit day. For example, if a country has a daily trading limit of 0.5% on its national currency, then on a particular day if the price changes more than 0.5% in any direction, the trading must be halted for the day. Occasionally, during the expiration month of a derivative, these limits are revoked as the prices can become extremely volatile.