Most everyone knows the purpose of circuit breakers in their homes: when a surge in electricity is overloaded within one zone, the circuit breaker trips and automatically shuts off electricity to keep your house from going up in flames. Same idea in the stock markets. When any panic results in either an extreme surge up or down, the circuit breakers trigger a halt in the market for a set amount of time. This is used to let traders stop and take a breath before losing their minds and their entire life’s savings in the matter of seconds. Panic will spread faster than facts and these circuit breakers help keep everyones emotions in check by slowing the pack’s mentality of severe panic. Although, sometimes theses circuit breakers don’t serve their purpose.

We are in historic times and today was another historic day. We set off a circuit breaker for the second time in one week and yet we still managed to drop -10% in the DOW and -9.5% in the S&P. The S&P had its worst day since 1987 despite these triggers to slow the bleeding.

You might also hear the term ‘limit-up’ or ‘limit-down’

 

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Circuit Breaker Levels

 

Level 1: If the index declines by 7% from previous close = 15 minute halt on trading.

Level 2: If the index declines by 13% from previous close = 15 minute halt on trading.

Level 3: If the index declines by 20% from previous close = all trading is halted for the remaining of the trading day.

Get to the point:

Circuit breakers are put in place to slow a panic buy or sell in the markets. It stops trading for a short period of time to slow the massive movements.

 

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