Limit Move

What Is a Limit Move?

A limit move acts as a market circuit breaker and is the maximum amount of change that the price of a commodity futures contract is allowed to go through in a single day. This amount gets its basis from the previous day's closing price. Trades are not permitted to rise above or drop below the set price once arriving at. The exchange where the futures contract trades will set the limit move.

On the off chance that the price climbs to quickly, it is supposed to be limit up; a fast decline could result in limit down.

Understanding a Limit Move

Limit moves exist on the futures exchange to prevent over the top volatility in a specific market. Several factors can incite market volatility or extreme changes. The most common are changes in response to the climate, consequences of the supply and demand report, and extreme market vulnerability. Today, a couple of commodities have limit move controls like those for grains, animals, and wood.

On the off chance that a specific contract contains control limits, the data will show up on the detail sheet on the exchange where it trades. The limit move doesn't halt trading of the commodity however rather suspends price moves. Traders may not buy over the high limit and can't sell below the low limit.

The daily controls will utilize the previous closing price and add an initial limit to that price. The initial limit will reset the bar, allowing the price to advance past the last close while it will likewise raise the base price. On the off chance that a market ought to try to surpass the limit in place, the following day the exchange might grow the limit move, giving the commodity more room to run.

Of course, this will likewise move the base price level up. The inverse may likewise happen where the market pushes the price below the base price. When the commodity starts closing at a rate that is neither the limit high nor the limit low, then the price will return to its original initial limit.

Types of Limit Moves

Limit moves which influence a commodity's futures contract are:

The lock limit which happens when the contract price of a commodity instrument moves past an allowable limit, halting trading for the afternoon.
A limit up is the maximum amount the price of a commodity futures contract might advance in one trading day.
Alternately, the limit down is the most the price might decline in one trading day.

Illustration of a Limit Move

For instance, expect that a timber futures contract is selling for $3.50, and has a previous day's close of $4. The exchange will set the initial limit at $4.25. During an especially dry developing season, an out of control fire has broken out and compromises a prime forest developing area. This event would make the futures price rise and maybe try to pass the $4.25 control point. The following day the exchange might extend the limit to $4.60.

Different Limits for Commodity Futures

Non-move related limits additionally exist in futures markets, including:

A position limit is a preset level of ownership or control which a trader can't surpass. Most position limits are set too high for an individual trader to reach, however they give stability in financial markets.
The exercise limit sets limitations on the number of a single class of contracts that a person or company might exercise inside a decent period. This action tries not to allow one entity to corner or effect the market of the fundamental security.
A daily trading limit is a maximum amount that an investor might profit or may lose on a derivative contract in any one trading session. These limits happen on the grounds that most futures trading utilizes margin.

Highlights

There are numerous other limit moves that apply to futures commodity contracts, for example, a position limit, exercise limit, daily trading limit, lock limit, limit up, and limit down.
A limit move is the maximum amount of change that the price of a commodity futures contract is allowed to go through in a day, set by an exchange.
The amount the limit move is set at depends on the previous day's closing price and isn't allowed to go above or drop below once the limit is reached.
The purpose of a limit move is to prevent over the top volatility in a market.
A limit move doesn't halt trading of the commodity however rather suspends price moves.