Stock market prices fluctuate constantly due to demand and supply. However, there are limits to how much a stock can rise or fall in a single trading session. These limits are called circuit breakers, divided into two categories: the Upper Circuit and Lower Circuit.
Understanding these limits is crucial for traders and investors, as it helps them make informed decisions about buying or selling stocks when these limits are hit.
In this blog, we will explore:
- What upper and lower circuits mean
- How they impact trading
- How to buy and sell shares when a stock hits the circuit limit
- Strategies to maximize profits and minimize risks
What is the Upper Circuit?
The Upper Circuit is the maximum price a stock can reach in a single trading session. When a stock hits this limit, trading activity is restricted because there are only buyers and no sellers.
How Does the Upper Circuit Work?
Each stock has a predetermined percentage limit set by the stock exchange, typically 5%, 10%, or 20% depending on market regulations. If a stock reaches this limit, trading stops temporarily or completely for the day, depending on the situation.
Example of an Upper Circuit:
- A stock trading at ₹100 with a 10% upper circuit can rise to a maximum of ₹110 in a day.
- If demand is high and the stock hits ₹110, no further buy orders will be executed unless sellers appear.
This creates a buy-only situation, making it difficult for new buyers to enter the stock unless they already have pending orders.
What is the Lower Circuit?
The Lower Circuit is the opposite of the upper circuit—it represents the maximum decline a stock can have in a single trading session. If a stock hits this level, there are only sellers and no buyers, making it difficult for investors to exit their positions.
How Does the Lower Circuit Work?
Like the upper circuit, each stock has a percentage limit (5%, 10%, or 20%) that dictates how much it can fall in a day. When the lower circuit is hit, trading halts because there are no buyers willing to purchase at that price.
Example of a Lower Circuit:
- A stock trading at ₹100 with a 10% lower circuit can drop to a minimum of ₹90 in a day.
- If panic selling occurs and the stock reaches ₹90, all sell orders remain unexecuted unless buyers step in.
This can lead to a sell-only situation, trapping investors who want to exit but cannot find buyers.
Also Read : Understanding Volume in Trading and How It Impacts Price Movements
How to Buy Shares During an Upper Circuit?
Buying shares when a stock hits its upper circuit is challenging because there are no sellers. However, you can try the following strategies:
1. Place a Pre-Market Order
Stock exchanges allow traders to place orders before the market opens. If you anticipate that a stock will hit the upper circuit, place your buy order in the pre-market session to increase your chances of execution.
2. Use a Limit Order Instead of a Market Order
A market order might not get executed when a stock is locked in the upper circuit. Instead, place a limit order slightly below the upper circuit price to improve your chances of getting the stock if sellers appear.
3. Monitor for Temporary Breaks
Sometimes, a stock hits the upper circuit but experiences slight pullbacks before locking again. Stay alert and place quick orders when sellers appear.
4. Check for Circuit Revision
In some cases, stock exchanges revise circuit limits if a stock repeatedly hits the upper circuit. Keep an eye on announcements to take advantage of new trading opportunities.
How to Sell Shares During a Lower Circuit?
Selling a stock that has hit the lower circuit can be tough because there are no buyers. Here’s how you can increase your chances of exiting:
1. Place a Sell Order Before Market Opens
If you anticipate a sharp fall, placing a sell order in the pre-market session can help you exit before the stock locks in the lower circuit.
2. Reduce Your Sell Price
If a stock is continuously hitting the lower circuit, slightly reducing your selling price (without going below the circuit limit) may increase the chances of getting a buyer.
3. Monitor Buyers in the Order Book
Sometimes, buyers appear in small quantities before the stock locks in the lower circuit again. Keep checking the order book and execute orders quickly when buyers show up.
4. Hedge Your Position
If you are stuck in a lower circuit, you can hedge your risk by taking opposite positions in derivative markets (futures and options) if available.
Also Read : Mastering Risk and Return in Trading for Long-Term Success
Impact of Circuit Limits on Trading Strategies
Circuit limits affect various trading strategies differently.
For Short-Term Traders
- Upper Circuit: Traders who buy stocks hitting the upper circuit aim for short-term momentum gains.
- Lower Circuit: If caught in a lower circuit, they may face heavy losses due to the inability to exit positions.
For Long-Term Investors
- Upper Circuit: Indicates strong buying interest, but investors should evaluate if the rally is sustainable.
- Lower Circuit: Can present a buying opportunity, but it’s crucial to analyze the company’s fundamentals before investing.
Risks & Precautions When Trading Stocks with Circuit Limits
Trading stocks that frequently hit upper or lower circuits comes with risks. Here are some precautions:
1. Avoid Chasing Stocks in Upper Circuits
Stocks hitting the upper circuit may seem attractive, but they can reverse suddenly. Always check the company’s fundamentals before investing.
2. Be Cautious with Lower Circuit Stocks
A stock in a lower circuit may seem cheap, but it could indicate deeper problems. Analyze news, earnings reports, and company announcements before making a decision.
3. Check Circuit Limit Rules for Each Stock
Different stocks have different circuit limits. Some stocks have 5%, while others have 20%. Knowing the limit helps in planning trades effectively.
4. Use Stop-Loss Orders
To minimize losses, use stop-loss orders to automatically exit trades before a stock reaches its lower circuit.
Also Read : 5 Ideas of Elliott Wave Theory
Upshot
Understanding Upper Circuit and Lower Circuit limits is essential for successful trading and investing. While upper circuits create buying frenzies, lower circuits cause panic selling.
By using smart strategies like pre-market orders, limit orders, and hedging techniques, traders can navigate these situations more effectively.
If you’re a beginner, focus on stocks with stable movements instead of circuit-hit stocks. Always analyze company fundamentals before making investment decisions.
Also Read : Learn to read Candlestick Charts in Easy ways
Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial advice. Trading involves significant risk, and past performance is not indicative of future results. Always conduct your own research or consult with a qualified financial advisor before making any investment or trading decisions. The author and the website are not responsible for any losses or damages incurred as a result of your trading activities.
