Define Daily Trading Limit:

"The term "daily trading limit" refers to the maximum allowable price movement or range within which a financial instrument, such as a stock, commodity, or futures contract, is allowed to fluctuate during a single trading session."

Explain Daily Trading Limit:

What is Daily Trading Limit?

It sets a boundary or restriction on how much the price of the instrument can increase or decrease within a specific time period.

Here are a few key points to understand about the concept of daily trading limits:

1. Purpose: Daily trading limits are implemented to maintain market stability, prevent extreme price volatility, and safeguard against potential market manipulation or disruptions. They are set by regulatory bodies or exchanges to ensure orderly trading and protect market participants.
   
   
2. Upward and Downward Limits: Daily trading limits typically have both upward and downward limits. These limits can be expressed as a fixed price range, percentage range, or points above or below the previous day's closing price.
   
   
3. Application: When the price of an instrument reaches the daily trading limit, it triggers a temporary halt or suspension of trading for that instrument. The trading halt allows market participants to assess new information, digest market developments, and determine the appropriate course of action.
   
   
4. Market Reaction: Once a trading halt is lifted, the instrument's price can continue trading within the daily trading limit range. If the price reaches the limit again, it may trigger additional trading halts or circuit breakers, depending on the rules and regulations of the specific market.
   
   
5. Exceptions and Circuit Breakers: In certain cases, such as during periods of extreme market volatility or news events, daily trading limits may be expanded or overridden temporarily. Circuit breakers, which are additional market safeguards, may come into effect to halt trading if predetermined thresholds are breached.

It's important to note that the specific rules and regulations regarding daily trading limits can vary across different markets, exchanges, and instruments.

Example of Daily Trading Limit:

Here's an example of a daily trading limit using hypothetical numbers for a stock:

Let's consider a stock with a daily trading limit of ±5% of the previous day's closing price.

1. Previous Day's Closing Price: $100.00

Based on the daily trading limit of ±5%, the price movement of the stock would be limited as follows:

• Upper Limit (5% above the previous day's closing price): $100.00 + ($100.00 * 5%) = $105.00
  
  
• Lower Limit (5% below the previous day's closing price): $100.00 - ($100.00 * 5%) = $95.00

So, for the current trading day, the price of the stock can move within the range of $95.00 to $105.00. If the price reaches either the upper or lower limit, it may trigger a temporary halt or suspension of trading for that stock.

It's important to note that the daily trading limit and its percentage or price amount can vary depending on the specific exchange, market, or instrument. The example above is for illustrative purposes only and does not reflect the actual daily trading limit for any particular stock. The actual daily trading limits are determined and imposed by the relevant regulatory bodies or exchanges.