DEFINITION of 'Daily Trading Limit'
The maximum gain or loss on a derivative contract, such as options and futures contracts, that is allowed in any one trading session. The limits are imposed by the exchanges in order to protect against extreme volatility or manipulation within the markets.
BREAKING DOWN 'Daily Trading Limit'
When daily trading limits have been reached, it is said to be a "locked market", and trading will halt for any trades that break the threshold or trading will close for that particular security.
Daily trading limits can also be in place for currency trading, such as China's daily trading limit of 0.5% for the Chinese renminbi against the U.S. dollar. When a particular commodity or contract has reached the daily trading limit, it may be considered "limit up" or "limit down", depending on the direction of the day's move.
Trading limits are much more important for derivatives than for stocks or bonds, for example, because so many investors use massive amounts of leverage to trade commodities, currencies and futures contracts.