Trailing stop-limit orders are type of pending orders that move along with market price. These trailing stops are used to limit the losses and exhibit a very interesting concept. It consists of two fixed amounts orders Trailing Stop Price and Trailing Sell Limit. These orders are placed either above or below the market’s current price. First price is called Trailing Stop Price. The second-order is called Sell Limit order or buy limit order. These orders placed either below the stop-loss price or above depending upon which side of trade taking place (buy or sell).
Still, confuse? don’t worry, we will explain this with an example and it will make more sense.
Why do we use Trailing Stop limit orders?
Traders use trailing stop limits to protect gains or cut the losses. Pending orders are used when the trader is not actively monitoring trade or trading long time frames. They use pending orders at specific technical levels for protection purposes. These orders remain on the platform and only executed automatically once the price reaches a certain price point. It offers convenience to traders as they do not need to be in front of the computer to execute these trades.
Now let’s understand trailing stop order with an example.
Trailing Stop Limit Order Example
Now let’s take an example of the Facebook Chart. Facebook is currently trading at the price of $189.94. Display in the following picture, we will place trailing stop sell limit order.
Now trader believes that the trend is up and I want to take long position at this price. But also concerned that what if the market goes down significantly. So the traders use Trailing Stop sell Limit Order to mitigate losses.
First, the trader will determine the fixed price at which the stop loss will be placed. The trader believes that if the price goes down $13 then it should enable my Sell Stop Limit Order. So trader place sells stop-limit order of $5 below the sell stop price. Do consider the sell stop limit order will only become active, once the price will touch $13 below the current market price mark.
If the market goes up then the stop-loss order and sell stop limit order will trail up accordingly.
Let’s explore this example further. As shown in the picture blow the prices reaches to sell stop price and it will activate the sell stop limit order.
As I mentioned above, when the price touch sell stop loss price, it enables the trailing stop order but it remains in pending state. This order will only execute once the price touch $5 blow the sell stop price.
As you can see the price never touched the Sell Stop Limit Order and continuously move up, the sell limit order was never executed. So the trailing stop price and trailing sell stop limit order continuously trail up along with price as mentioned in the picture below.
So in nutshell, this concept is great when traders do not require to be in front of a PC to execute a trade and these orders automatically recalculate themselves along with the market price. It offers convenience to the end-user.
Sell limit orders does not guarantee the order will fulfill and if the market moves very suddenly towards limit order price, it can potentially miss the sell limit order and the user can sit on significant loss or wait for the market to come back to the same price and take sell position from there.
I hope you understood this concept now and don’t forget to check other types of market orders on this site.