Time to time we hear this stock has hit upper circuit OR that stock has hit lower circuit OR that stock has upper freezed. So what exactly is freezing or circuit in share market? The market price is based on sentiments. In case of sudden news OR extreme euphoria single sided the sentiment can become uncontrolled. The price of a scrip can increase OR decrease in uncontrolled way in case of extreme sentiments. Thats why exchange has the provision of circuit filters. In this post I shall discuss more on upper and lower circuits and will also discuss how to trade upper circuit stocks.
Circuit in share market is the limit of gain OR loss in a single day for any stock. This is also called the circuit breaker in the stock market. Circuit breaker is also applied on indices apart from stocks. Circuit breaker system applies at 3 stages of the index movement – 10%, 15%, 20%. When the index circuit breaker is triggered there will be a trading halt in the stock market.
Similarly when the circuit breaker triggers in any equity the trading of equity also becomes limited. In case of upper circuit or buying freeze no further buying is allowed and in case of lower circuit or selling freeze no further selling is allowed. The circuit breaker limit depends on stock to stock between 5%-20%.
Now How To Trade Upper Circuit Stocks?
It looks very easy to trade upper circuit stocks because they moves buying freeze after buying freeze day by day. But things will change, one day it will hit lower circuit and then repeated lower circuits. How will one catch the full move and exit after then?
Check the daily chart above to identify both upper and lower circuit in share market and see Focus Lighting in NSE SME exchange started hitting upper circuit since listing and now its hitting lower circuit. The rule of thumb is wait for release of upper circuit in a stock after series of buying freezes and sell the stock immediately. Else you will be trapped in lower circuits.
Check the hourly chart above and note Focus Lighting gave us exit opportunity on 2nd May 2017 when it released upper circuit for the first time in 12 days.
Indrajit is a professional blogger and trading system developer. Amibroker expert, Wordpress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.