Limit up is a restriction on upward movement of prices on futures contracts set by officials at a market to prevent uncontrolled speculation and volatility. It is a daily limit on the maximum amount a price can increase in a given market. Once it is reached, trading in those contracts is halted until the price drops back down and trading can resume. Setting a limit up is used to prevent situations where prices spiral out of control and crash hard once investors adjust their trading strategies.
The limit up for a given market can vary, and traders are usually aware of the maximum daily price increase allowed in daily trading. Traders want to avoid situations where a market is closed entirely or frozen, as these can have an averse impact on business. Once the limit up is reached, no more trading can take place until people are willing to take lower prices, and traders may wait until the next day for trading because they do not want to accept a lower price.
Sometimes, contracts for a given commodity become highly volatile due to issues like political events or industry news. In this situation, the limit up may be reached several days in a row as traders quickly push the price of futures contracts up at the start of trading each day. The equilibrium is never reached because trading hits the allowed ceiling first. This can pose problems for investors and analysts alike, as it may be difficult to get an accurate value estimate when trading is not allowed to proceed freely.
Usually, several days of hitting the limit up in a futures trading market eventually results in a return to normal trading, with the price moving within more familiar confines and traders actively buying and selling futures contracts. A rapid spike in value can be indicative of shifting attitudes on the part of investors in addition to changes in the market, and analysts typically remain alert to any signs of volatility so they can act quickly to take advantage of upward or downward trends in commodity values.
When prices are close to reaching the limit up, intensity of trading may increase as people attempt to complete deals before trading is halted in response to concerns about volatility. Traders with less experience may be caught on the outside of the spike in trading and could potentially take a loss by failing to act quickly enough.