What is a Trailing Stop Limit Order?
Key Takeaways
● A trailing stop limit order is a stop limit order in which the stop price is not specified, but a defined percentage or fixed amount, above or below the current market price of the security.
● A trailing stop limit order is designed to protect gains by enabling a trade to remain open and continue to profit as long as the price is moving in a favorable direction.
● After a trailing stop limit order is triggered, there is no guarantee that the order will be filled.
Understanding trailing stop limit orders
A trailing stop limit order allows investors to set a trailing amount or trailing percentage. Then the system continually recalculates the stop price as the market fluctuates. When the stop price is hit, a buy/sell limit order will be submitted at the last calculated limit price. The limit price is determined by how far from the stop price you'll allow your sale or purchase to take place, and the difference between the two prices is called the limit offset.
A trailing stop limit order guarantees a specific execution price. However, there is no guarantee that the order will be filled.
The order follows the "buy high and sell low" rule. The trailing amount or percentage should be greater than 0, and the limit offset needs to be no less than 0.
Formulas for calculating the stop price
● Buy trailing stop limit order
If the trailing amount is set,
Initial Stop Price = Initial Market Price + Trailing Amount
Adjusted Stop Price = Lowest Market Price + Trailing Amount
If the trailing percentage is set,
Initial Stop Price = Initial Market Price * (1 + Trailing Percentage)
Adjusted Stop Price = Lowest Market Price * (1 + Trailing Percentage)
Limit Price = Adjusted Stop Price + Limit Offset
● Sell trailing stop limit order
If the trailing amount is set,
Initial Stop Price = Initial Market Price – Trailing Amount
Adjusted Stop Price = Highest Market Price – Trailing Amount
If the trailing percentage is set,
Initial Stop Price = Initial Market Price * (1 – Trailing Percentage)
Adjusted Stop Price = Highest Market Price * (1 – Trailing Percentage)
Limit Price = Adjusted Stop Price – Limit Offset
Examples of Trailing Stop Limit Orders
● Buy trailing stop limit order
Assuming a stock has a current price of $10 and you submit a buy trailing stop limit order with a 50% trailing percentage and a $1 limit offset, the order's initial stop price will be $15 (10 + 10 * 50%). When the market price falls, so does the stop price; when the market price rises, the stop price doesn't change. Once the stop price is reached, the order will be triggered.
Before the buy order is triggered, if the market price falls to as low as $8, the stop price will be adjusted to $12 (8 + 8 * 50%). When the market price rises to $12 or higher, a buy trailing stop limit order set at $13 (12 + 1) will be submitted automatically to the broker.
● Sell trailing stop limit order
Assuming a stock has a current price of $20 and you submit a sell trailing stop limit order with a $5 trailing amount and a $1 limit offset, the order's initial stop price will be $15 (20 – 5). When the market price rises, so does the stop price; when the market price falls, the stop price doesn’t change. Once the stop price is reached, the order will be triggered.
Before the sell order is triggered, if the market price rises to as high as $30, the stop price will be adjusted to $25 (30 – 5). When the market price falls to $25 or lower, a sell trailing stop limit order set at $24 (25 – 1) will be submitted automatically to the broker.
Notes
● Clients can set an order's time in force. A trailing stop limit order will only be triggered during the preset trading period.
● After a trailing stop limit order is triggered, there is no guarantee that the order will be filled. If the order is not filled during its time in force, it will be canceled automatically by the system.
● After a trailing stop limit order is triggered, whether it is filled or not, the trigger conditions will not be effective again. Please place a new order if necessary.