Limit up and limit down are the maximum amounts a commodity future may increase (limit up) or decrease (limit down) in any single trading day.
They are used to protect futures contracts from unexpected events that may cause major moves in its underlying commodity’s price. Without a limit up or limit down, there is a risk that a futures contract’s price will reach an irrational value because of market panic.
Limit ups and limit downs can cause a discrepancy between a market’s price and the price reflected in its corresponding futures contract. If a market makes a major move in a very short amount of time, the contract price may reach its limit up or limit down for several days before it matches the market’s price once more.
