So many people have no idea they are trading on a circuit breaker exchange. That confuses me. This is something you need to know.
Even if you do all due diligence, get in safely, and manage your risk … what if the stock freezes? You are stuck in a volatile stock and have no idea which direction it will head when trading resumes.
Don’t let the market surprise you. The more you learn about your environment, the better you can function in it.
It’s all about this. Learn a little each day and after a while you will start connecting the dots.
I’ve been following the same patterns for over 20 years because at the beginning of my career I took the time to study every day. After a while, I started making contacts. The idea is to expose yourself to as much information as possible in order to prepare.
Sometimes you get surprised … It happens. However, if you panic and panic, your account could suffer. Don’t let your emotions rule your trading.
Let me help you better understand the circuit breaker market …
What is a circuit breaker on the exchange?
Stock breakers are designed to stop panic selling and reduce excessive volatility.
Check out my FREE Volatility Survival Guide for instructions on how to do this …
Market Wide Circuit Breakers (MWCBs) follow the S&P 500. That is, if the index falls too many percentage points, trading on certain US exchanges will cease.
You need to understand this as it affects every trader in the market. When a MWCB is activated, your open positions will be paused even if the stock you are playing is not volatile.
A trading break gives people time to digest new information and re-evaluate their emotions.
That’s not necessarily a bad thing. A big part of trading is controlling emotions. I talk about it all the time. Losing is part of the game. But the key is to control your losses.
That is why there are circuit breakers.
Even the best traders sometimes let their emotions get the best of them. Some traders only need a few minutes to think. It could be the difference between a market crash and a rebound.
In extreme cases – when the S&P 500 falls too much – trading will be suspended for the rest of the day. Trading outside of business hours will also be discontinued.
The bottom line: when you are in a stock and trading stops, you need to know what is going on. How to make the best decision when trading resumes.
How does a circuit breaker work on the stock exchange?
Trading stocks that make big moves can seem attractive. But big potential gains mean big losses are just out of sight.
Circuit breakers stop these losses and reduce volatility. Let’s break it down …
This is the first line of defense. A level 1 breaker will activate when the S&P drops 7% or more. It is measured on the previous day’s closing price.
Trading will be paused for 15 minutes … unless it is after 3:25 pm Eastern, as there is usually volatility in the last 35 minutes of the trading day.
If trading resumes but the S&P continues to drop to 13% or more, trading will be suspended for another 15 minutes. Again, if it happens after 3:25 p.m. East, everything goes on as usual.
That’s code red. If the S&P 500 falls 20% or more, trading will be suspended for the remainder of the day. Level 3 circuit breakers can be activated at any time of the day.
What is the breaker rule?
It is also known as the limit-up-limit-down rule (LULD). Just as there are MWCBs, there are also circuit breakers for individual stocks.
Do you see how circuit breakers are a big part of our current trading environment? This is a historically unique market. You need to know what you are dealing with.
There’s a difference between MWCBs and the LULD, so let’s go over it …
The biggest difference you need to know is that MWCBs only stop trading because of volatile downward movements, but LULDs keep stocks from falling or above.
The limits are also different.
Generally, trading will stop when stocks rise or fall above the 5%, 10%, and 20% limits. Levels can vary based on what you are trading.
The percentages are doubled in the first 15 minutes and the last 25 minutes of the day as trading tends to be more volatile at the beginning and end of the trading day.
We calculate the percentage loss from the average price over the last five minutes. The stock must trade outside the percent limits for 15 seconds to trigger the stop.
Halts usually last five minutes, but they can also last 10 minutes. It depends on the situation.
Curious how it all started? It’s pretty interesting. Listen…
History of the circuit breaker on the stock exchange
On October 19, 1987, the Dow Jones Industrial Average (DJIA) lost 500 points and fell 22%. It is still the largest percentage loss in US stock market history.
It was a result of world politics at the time and the rise of the computer trade. Starting in Hong Kong, the massive sell-off affected markets around the world.
After that, crash regulators agreed that the markets needed a system to protect against such major relapses.
It wasn’t perfect. It developed after the limits couldn’t stop the 2010 flash crash. At this point the market was falling 9% in 10 minutes.
The MWCB used to follow the DJIA, but switched to the S&P 500 in April 2013. At that time, regulators also created the LULD rule.
Notice how the environment changes over time. Never get too comfortable. Regulations can change at any time and you need to be up to date.
Trading has only ceased market-wide a few times since 2013.
When was the last breaker?
The last time a MWCB stopped trading was March 18, 2020. The decline was mainly due to the pandemic. It’s no secret that lockdowns and uncertainty hit the stock market hard in 2020, especially at the beginning.
It was a level 1 breaker. In the early afternoon trading was suspended for 15 minutes and then resumed.
How many breakers happened in the US?
There have been multiple circuit breaker trips in the United States. Some are market-wide, but most are individual and occur more frequently.
One of the most notable was October 17, 1997, when there were only two levels of circuit breakers. Trading was suspended for 30 minutes if the DJIA lost 350 points in one day. The second price stopped trading for the remainder of the day after falling another 200 points.
At that time, a level 1 circuit breaker trip was only 4.5% lower. Some considered the stop unnecessary given the small percentage loss.
Since then, the MWCB rules have changed. They started following the S&P 500, switching to a percentage system instead of points.
March 2020 showed us the real power of the trade freeze. On four different days, the market paused trading for 15 minutes. All due to growing pandemic concerns.
All four stops were level 1 circuit breakers. Who knows how far the market could have fallen without the trading break.
That is why I say it is good to study the past. It will help you understand how the breaker exchange came about. Anyone can read a book about rules. But if you really want to understand this environment, study its history. Try to find out why we have breakers.
The MWCBs are supposed to lower volatility, but some traders are less trustworthy …
Circuit breaker stock market review
Some people think that the breaker exchanges do more harm than good. They argue that rather than reducing volatility, they create it.
When trading is stopped, orders pile up … until the market reopens. Then the market rises with a series of orders placed during the stop.
I’ve seen level 2 quotes when the orders pile up like that. It’s a huge landslide effect. Try to find a stock that has been paused and watch what Level 2 does when trading resumes. It’s a great learning opportunity.
When you get stuck in a stock, you need to know what is going on so that when the deadlock wears off, you can make the best decision to stay safe.
Check out my Learn Level 2 DVD to learn more about this great trading tool. I use it for every trade …
Circuit Breaker Exchange: Frequently Asked Questions
What is a circuit breaker?
It is a regulatory measure that seeks to reduce volatility and panic selling in the stock market. There are market-wide breakers and breakers for single stocks. If the volatility rises above a certain level, trading is stopped.
Do individual stocks have breakers?
Yes, and unlike MWCBs, individual stocks can hold up and down. Too large a price swing invokes the limit-up-limit-down rule and trading is interrupted for 5 to 10 minutes.
Does Nasdaq have breakers?
Yes, the Nasdaq has MWCBs. Most of the major exchanges do. Since Black Monday, the supervisory authorities have been convinced that we need security measures to protect the markets.
The bottom line on the Circuit Breaker Stock Market
Thank you for taking the time to read about circuit breakers. Traders who are more knowledgeable about their surroundings are prepared to succeed.
You should try to learn more every day. This is how the best got where they are.
Stock trading is tough. It takes a lot of time and dedication.
Take it from me I realize that I am a better teacher than a trader. I’ve been teaching others how to trade stocks for a little over a decade.
The Trading Challenge is not for the faint of heart. All of my millionaire students spent months and years studying before they found their way. If you think this is for you, apply … but I don’t accept everyone. You have to show me that you can do the job.
If you’ve read this far, you might have what it takes.
Hope this post helps you if you ever get stuck on a stopped stock again. If volatility rises, we could see more of a circuit breaker stock market. And when it happens to you, remember to find out why the stock you are trading has stopped and keep your expectations realistic. Emotions only confuse your head.
What do you think of circuit breakers and the circuit breaker exchange? Have you ever got stuck in a stopped stock? Comment below. I love to hear from all of my readers!