Circuit Breakers in NEPSE: How Upper and Lower Limits Protect (and Trap) Traders
Circuit breakers in NEPSE — better known as upper and lower price limits — are designed to protect investors from extreme volatility. But do they always help, or do they sometimes trap traders at the wrong time? Let’s break down how these limits work, why they exist, and what strategies investors can use around them.
Introduction
Ever seen a stock in NEPSE suddenly stop moving because it hit its upper circuit or lower circuit? That’s not a coincidence — it’s the Nepal Stock Exchange’s circuit breaker mechanism kicking in.
Circuit breakers are daily price fluctuation limits placed on stocks to prevent excessive volatility. In simple terms, they set the maximum percentage a stock’s price can rise or fall in a single trading day.
For example:
If a stock closes at NPR 500, and the limit is 10%, it can only trade between NPR 450 and NPR 550 the next day.
Once the price touches either end, trading freezes for that stock — no matter how strong demand or supply is.
These mechanisms are meant to protect investors and maintain market stability. But many traders argue they also create traps that lock people into losing positions or prevent them from riding profitable trends.
Let’s dive deeper.
Why Circuit Breakers Exist in NEPSE
The NEPSE is still a relatively shallow and sentiment-driven market. Unlike bigger markets with huge institutional participation, daily price swings in Nepal are often triggered by:
Sudden news headlines (e.g., dividend announcements, rights issue, regulatory policy).
Herd mentality of retail investors rushing to buy or sell.
Low liquidity in certain stocks where even small trades can move prices significantly.
Without circuit breakers, a single rumor or panic wave could cause 20–30% intraday swings, destroying investor confidence.
Thus, the Nepal Stock Exchange enforces upper and lower limits to:
Prevent manipulation by restricting pump-and-dump operators.
Give cooling-off periods so traders can reassess before panic selling.
Protect small investors who don’t have access to real-time insider news.
How Upper and Lower Circuits Work
NEPSE’s circuit breaker framework varies based on stock type and trading environment. But in general:
Upper Circuit (UC): Maximum % a stock can rise in a single day.
Lower Circuit (LC): Maximum % a stock can fall in a single day.
For most stocks, the limit is 10% from the previous day’s closing price.
📌 Example:
Previous close = NPR 1,000
Upper Circuit = NPR 1,100
Lower Circuit = NPR 900
If buyers keep pushing bids, once the stock touches NPR 1,100, trading halts — no more upward movement allowed. Similarly, if sellers rush and it falls to NPR 900, it freezes there.
The Psychology Behind Circuit Breakers
While circuit breakers are meant to reduce panic, they often create fear of missing out (FOMO) or fear of being trapped:
On Upper Circuits:
Retail traders pile in at any price just to “catch the rally.”
Buyers often get stuck in long queues, unable to buy because demand exceeds supply.
On Lower Circuits:
Panic sellers rush to exit, but often no one is willing to buy.
Investors get stuck with falling shares, unable to exit their position.
This shows that circuit breakers don’t remove volatility — they shift it into the next trading day.
Do Circuit Breakers Actually Protect Investors?
Yes and no.
✅ Pros:
Limit extreme daily losses.
Reduce chances of sudden market crashes.
Give investors time to digest news.
❌ Cons:
Trap investors in illiquid positions.
Encourage herd mentality (long queues at circuits).
Delay price discovery — the “real” price is revealed only after multiple days of limits.
In essence, circuit breakers buy time but don’t remove risk.
Real Examples from NEPSE
Hydropower Stocks Boom (2021–2022):
Many hydropower IPOs hit continuous upper circuits for weeks. Investors who got allotments saw huge paper profits, but latecomers buying at the circuits often faced sharp corrections later.Microfinance Crash (2023):
Regulatory tightening caused panic, and several microfinance stocks hit continuous lower circuits. Investors who couldn’t sell were trapped for days, watching losses mount.NRB Policy Announcements:
Whenever Nepal Rastra Bank issues unexpected policies (like credit caps or dividend restrictions), the next day often sees widespread lower circuits across banks and finance companies.
Strategies for Investors Around Circuit Breakers
1. Avoid Chasing Upper Circuits Blindly
If a stock is hitting the upper circuit for several days, it usually means the rally is already overextended. Wait for consolidation instead of rushing into queues.
2. Don’t Panic in Lower Circuits
Unless the company’s fundamentals are broken, panic-selling at lower circuits often locks in the worst possible loss. Patience pays off.
3. Use Stop-Loss Discipline
Since NEPSE doesn’t allow intraday trading, plan your exit before you enter. Decide at what price you’ll sell if the stock goes against you.
4. Focus on Liquidity
Highly liquid stocks (like NABIL, NICA, NMB, hydropower blue chips) are safer during volatility because you’re more likely to find buyers/sellers even when circuits hit.
5. Watch Market Sentiment
Circuit breakers are less about fundamentals and more about psychology. If the whole sector is under pressure, lower circuits may continue for multiple days.
The Global Context: How Other Markets Do It
US Stock Market (NYSE/NASDAQ): Uses market-wide circuit breakers when indexes fall 7%, 13%, or 20%.
India (NSE/BSE): Uses stock-wise daily price bands similar to NEPSE, typically 5–20%.
China: Known for stricter limits (±10%) which often led to “trapped investors.”
NEPSE’s system is closer to India’s, designed for an emerging market with heavy retail dominance.
Conclusion: Protection or Trap?
Circuit breakers in NEPSE are a double-edged sword. They succeed in protecting investors from sudden shocks, but they also create artificial barriers that can trap traders on both sides of the market.
For long-term investors, circuit breakers are merely temporary speed bumps. But for short-term traders, they can make or break a strategy.
The best approach? Respect the limits, understand the psychology, and never trade just because a stock is at its circuit.
At the end of the day, circuit breakers don’t change the fundamentals — they only delay how fast the market reflects them.