An area of risk in trend trading is at the exchange itself. Some of the following situations are rare, but they can and do occur.
One of the more common exchange-based risks is the trading halt, which occurs when the exchange stops a stock from trading for a short period of time. You aren’t able to enter or exit that stock until the halt is lifted by the exchange. Trading halts are imposed for various reasons, such as the following:
Important company news may dramatically impact the valuation of its stock. The purpose of the halt is to allow the public to digest the news and avoid an emotional knee-jerk reaction in trading.
Delayed opening of a stock when a critical imbalance exists between buy and sell orders (often caused by unexpected news announced after the close of the previous trading day).
A trading suspension of a stock occurs when the Securities and Exchange Commission (SEC) determines that the trading public is at risk due to inaccurate or missing information filed by the company. The SEC can suspend a stock from trading for a longer period of time (up to ten business days) than a trading halt.
When a stock or the entire market makes dramatically large moves in a short period of time, the exchanges may exercise curbs in an attempt to protect investors from such volatility. Curbs are now commonly referred to as market-wide circuit breakers. The exchanges stop trading if the market experiences such a dangerously fast and deep price drop as to come close to threatening the liquidity of the market.
These circuit breakers can be set at several levels, based on a percentage of the loss of value from the previous day’s close.
