Investing 101: Traling Stop Limit Order

Trailing Stop Limit Order

A trailing stop limit order is designed to allow an investor to specify a limit on the maximum possible loss, without setting a limit on the maximum possible gain.  This order type works the same way as the trailing stop, only instead of a market order being sent to the exchange, a limit order will be sent to the exchange. With this order, you will be able to stipulate the worst price you are willing to accept for a fill. There is no guarantee that you will be filled, though, as the price may gap through your limit price.

  • A SELL trailing stop limit moves with the market price, and continually recalculates the stop trigger price at a fixed amount below the market price, based on the user-defined “trailing” amount. The limit order price is also continually recalculated based on the limit offset. As the market price rises, both the stop price and the limit price rise by the trail amount and limit offset respectively, but if the stock price falls, the stop price remains unchanged, and when the stop price is hit a limit order is submitted at the last calculated limit price.
  • A “Buy” trailing stop limit order is the mirror image of a sell trailing stop limit, and is generally used in falling markets.
  • The main difference is that for Trailing Stop Limit Order, when the Stop Price is passed, the order will be converted into a Limit Order, whereas for Trailing Stop Order, it’ll convert into a Market Order.
  • As a result, Trailing Stop Limit Order carries a big risk, as the order may never get filled if the market price is worse than the Limit Price. As a result, the position can continue falling with no more protection for the position. This makes Trailing Stop Limit Order a very insecure stop loss method, particularly for the extremely volatile stocks that often experience a gap up or gap down in prices.  Due to this risk, using Trailing Stop Limit Order to protect a position is not advisable. 

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