What is 'Limit Move'

The limit move is the largest amount of change that the price of a commodity futures contract is allowed to undergo in a single day. The limit is based off the previous day's closing price. Trades are not permitted to rise above or drop below the set price once the limit is reached. The limit is set by the exchange on which the future trades.

BREAKING DOWN 'Limit Move'

Limit moves exist on the futures exchange to prevent excessive volatility in a particular market. These extreme changes can be prompted by several different factors, but most commonly they are in response to weather, the supply and demand report and excessive market uncertainty. The limit does not halt trading of the commodity, but instead halts price changes. It is sometimes also known as a daily trading limit. There is also an initial limit, which is the amount of change that is permitted to occur each day. This amount is determined ahead of time and sets the bar for daily moves.

While many commodities have limit moves, some do not. Grains, livestock and lumber are just a few commodities with daily limits. This information can be found on the contract specification sheet on each exchange.

Example of 'Limit Move'

For example, assume that a lumber futures contract is selling for $3.50, and has a limit of $4. During a particularly dry growing season that sees drought and wild fires, supplies of lumber may be drastically reduced. This could cause the futures price to rise to the $4 limit level. Although trades are still permitted on the lumber exchange, they cannot go above the $4 limit. This is referred to as a lock limit. The lock limit will be removed once the commodity begins closing at a rate that is neither the limit high nor the limit low, and the price will return to its initial limit.

As an additional protection from market volatility, some traders put a protective stop in place, and designate a stop price. Once the commodity is trading at the stop price, a market order is issued and trading is stopped. There is a danger to having a stop price that is too close to the limit move, so it is imperative that a trader investigate the limitations of each futures commodity they wish to invest in. Otherwise they may find their trading stalled out in excessive trading situations and be unable to make any moves with their stock until the initial limit is once again reached.
 

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