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Trailing Stops Explained

What is a trailing stop order?

A trailing stop order is a special kind of stop loss order. Selling with a stop loss order lets you say, "if the bid price falls to my trigger price, allow my sell order to execute on an exchange." This is true for both traditional stop loss orders and trailing stop orders. The key difference between a traditional stop loss order and a trailing stop order is that the trigger price in a stop loss order doesn't change, but the trigger price for a trailing stop order can move up with the market. In both cases, if the bid price falls to or below the trigger price, your order may execute.

There are four flavors of the trailing stop order:

  • Trailing Stop ($): triggers a market order.
  • Trailing Stop (%): triggers a market order.
  • Trailing Stop-Limit ($): triggers a limit order, Day or Good Until Canceled.
  • Trailing Stop-Limit (%): triggers a limit order, Day or Good Until Canceled.

Why would you want to use a trailing stop order?

A trailing stop order can be used as a strategy to minimize losses and protect gains. If the price moves up, your stop price will also move up, which could help protect gains. If the price moves down, your order may execute, which may minimize your losses. Keep in mind, a trailing stop order will not guarantee protection from losses in a volatile market.

Trail Amount

The trail amount is how closely you want your trigger price to "trail" the bid price. When the market moves, we check to see if your trigger price needs to be adjusted upward, and we use your trail amount to do the math. If the difference between the current bid price and the current trigger price ever exceeds your trail amount, we will shift your trigger price up to match your desired trail amount.

Note: The trail amount must be between $0.01 and $30.00 or between 1% and 30%. The trail amount can never exceed 30% of the bid price when the order is entered.

Trigger Price

Your order will be triggered and sent to an exchange when the most recent bid price falls to or dips below your trigger price. The trigger price can only increase in price (it will never decrease).

  • Current Trigger Price ($) = (Highest bid price achieved) - ($ Trail Amount)
  • Current Trigger Price (%) = (Highest bid price achieved) - (Bid price * (100% - Trail Amount %))

Trailing Stop-Limit

A trailing stop-limit triggers a limit order (instead of a market order) if the bid price falls to your trigger price. It's like saying, "If the bid price falls to my trigger price, I want to sell, but I only want to sell if I can get this limit price or higher." That limit price can be your trigger price or less, depending on your limit offset.

Limit Offset

The Limit Offset lets you tell us how much less than the trigger price you are willing to sell for. You can enter a value from $0.01 up to $1.00. The limit price cannot be higher than your trigger price.

  • Limit Price (if/when the order is activated) = Highest Trigger Price Achieved - Limit Offset Amount

Note: The limit offset can only be entered in dollar increments for both $ and % based trailing stop-limit orders.

Let's look at a few examples:

  1. Trailing Stop ($): You entered a $1.00 trail amount on a $10.00 security. Your initial trigger price will be $9.00 ($10.00- $1.00). If the price of the security goes up to $20.00, your new trigger price will be $19.00 ($20.00- $1.00).
  2. Trailing Stop (%): You entered a 10% trail amount on a $10.00 security. Your initial trigger price will be $9.00 (90% of $10.00 is $9.00 and we get 90% because 100% - 10% = 90%). If the price of the security goes up to $20.00, your trigger price will now be $18.00 (90% of $20.00).
  3. Trailing Stop Limit ($): You entered a $1.00 trail amount on a $15.00 security and included a Limit Offset of $0.25. Your initial trigger price will be $14.00 ($15.00 - $1.00) and the order will have a limit price of $13.75, if the order is triggered at $14.00.
  4. Trailing Stop Limit (%): You entered a 10% trail amount on a $30.00 security and included a Limit Offset of $0.50. Your initial trigger price will be $27.00 ($30.00 - 10%) and the order will have a limit price of $26.50 ($27.00 - $0.50), if the order is triggered at $27.00.

What's the difference between ($) and (%) based trailing stops?

As you can see, the initial trigger prices in examples 1 and 2 are identical (i.e. $9.00). In both cases the security goes up to $20.00 per share. The key difference is that the new trigger price for the trailing stop ($) order is $19.00, whereas the new trigger price for the trailing stop (%) order is $18.00. Hmm, why is this? Well, 10% of $10.00 per share is $1.00 but 10% of $20.00 per share is $2.00 (vs. $1.00), which is where the difference comes into play.

Which securities are eligible?

Trailing Stops can only be used for listed equity securities.

Important: Trailing stop orders involve unique risks. By using our trailing stop service, you acknowledge that you have read, understand, and agree to the Trailing Stops Terms and Conditions.