Many futures markets, but not all, have daily limits that prevent them from moving more than a predetermined amount set by the exchange. For example, the current limit for Corn is 40 cents as of February 2014. That means that Corn can only move 40 cents higher or lower from the previous day’s settlement price. So if Corn settled at $4.50 the day before, the limits for the next day’s trading session is $4.10 ($4.50 – $0.40) and $4.90 ($4.50 + $0.40).
To find the daily limit for any market, the best place find it is on the exchange’s site. For corn, that would be the CME Group. On the corn page, there is a Contract Specifications tab. In the table, one of the data sets will have the Daily Price Limits. Visit the corn contract specifications page at the CME Group.
Not every market has price limits. Gold, Silver, Coffee, Sugar and Cocoa are among the contracts that do not have price limits. Corn, Wheat, Soybeans, Cattle, Hogs and Cotton are some of the contracts that do have price limits. Each exchange has a contract specifications page for each listed market which will tell you if the contract has daily price limits along with their limit values.
When a contract trades to the max daily price limit, and the market moves past the limit prices, the contract stops trading. Let’s take corn for example. Imagine that corn settled $4.50 the day before a major USDA report. On report day, the USDA was wildly bullish and the market immediately moves limit up. The market stops trading at $4.90. The exchange will not allow a bid price past $4.90, so the best you can do is put in an order to buy corn at $4.90. The only way to get filled is if someone decides to meet your bid at $4.90.
Let’s say that the report was so bullish that market thinks corn is now worth $5.00. If the limit is at $4.90, chances are corn will not trade for the remainder of the session. After the market closes, if corn settles at limit up prices, the new settlement price will be $4.90. When the next trading session opens, corn will be able to trade between $5.30 ($4.90 + $0.40) and $4.50 ($4.90 -$0.40). If the market still prices corn at $5.00 at the open, it will open up at $5.00 and traders will be able to buy and sell again.
Sometimes the exchange will expand the limits by 50% for only the day after a limit up or down occurs. For example, the limit for corn is currently 40 cents, but if we do finish a trading session limit up or down, the limit for the next session may be 50% greater than the limit range from the day before. In this case, it would be a 60 cent limit (50% more than 40 cents). The exchange will make the announcement the day of the limit move if they decide it is necessary to expand the limits. If the next trading session does not result in a limit move, then the limits go back to the normal range. In this example for corn, the limit would go back to 40 cents.
One last point that all traders should know is the daily price limit mostly applies only to flat priced futures. There are no limits for futures spreads and options. The major benefit of this is that if a trader was caught in a limit up or limit down move, they will have the ability to exit that market via the futures spread or option market even those the flat priced contract is lock limit. Check out my articles to learn more about Trading Lock Limit Markets with Futures Spreads and Trading Lock Limit Markets with Options.
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Turner Breakout Reversal (TBR) Methodology
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