Candlestick Trading Blog
March 16, 2010
Trading Limits
| Whether traders are involved in the stock market, commodities markets, options trading, futures trading, or trading the foreign exchange market there are trading limits. A daily trading limit is the maximum that an equity can go up or down in a day before the security exchange halts trading for the day. Personal trading limits include the limit orders that traders use to reduce investment risk. Limits also exist for the number of contracts a trader can hold at one time during the day as well as the number of contracts traded per day. There is currently a concern expressed by ex Federal Reserve Chairman Paul Volcker that limits on risky trading need to be placed on banks to protect depositors. Daily Trading Limits Trading limits came into being help prevent market crashes. If trading on stocks, commodities, or futures goes into freefall, trading is halted on an equity or on the entire market. Although addition of daily limits on trading is relatively new it is akin to the very old practice of declaring bank holidays during an economic crisis. Traders should be aware, however, that each limit is for one day. The next day the same limit applies so an equity can still fall dramatically over several days. Limit Orders A good piece of advice is never to buy or sell at market prices. Whether you are trading commodities online or calling a stock broker to buy a stock for long term investing always use a limit order. Offer to buy at or below a given stock price or sell at or above a given commodity price. Using limit orders will get you in and out of the various markets at the prices you determine. A stop loss order is a type of limit order. The investor will place an order to sell a security if the stock price drops to a certain price to prevent further loss. Number of Contracts a Day or in Hand A commodities exchange will typically limit activity of large, usually institutional, investors who have the capacity to corner the market. Thus the exchange will place a limit on how many contracts an institution may trade in a day and how many trades it can have in hand at any moment. These rules are enforced by the exchanges. The stock market news recently reported a fine of over $100,000 given a large institutional investor for exceeding the limit on number of contracts a day. This came on the heels of the same institution being fined for having too many contracts trading at the same time. Trading Limits and Protection of Bank Depositors A more global issue related to trading limits may have an effect on bank stock investing. The market news reports a talk given by past Federal Reserve Chairman Paul Volcker. Mr. Volcker is currently a White House economic advisor and, speaking for the White House, expressed concern about banks hedging in highly leveraged investments. The concern is that banks have a responsibility to depositors to stay solvent. Although hedged investments can be very profitable they also can be very risky as stock market crashes have demonstrated. As many banks were bailed out in the early stages of the economic recovery they may be beholding to the government and government appointees on their boards of directors to limit trading in high risk investments. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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