Understanding trailing stop limit orders
How a sell order works
First, youll look at the current market price of a stock and decide how much that price could fall before youd want to sell. Then, you set your trigger delta:
- If the price falls 5%, I want to sell
- If the prices falls $5, I want to sell
Investors Edge calculates the price that will trigger your sell order based on the stocks current market price. This trigger price is recalculated as the market price rises. The trigger price does not change when the market price falls.
The trigger is there to help limit your downward moving sell price and if it was recalculated as the stock price falls, your sell order would never be triggered.
Your sell order will be triggered as a limit order. You determine the limit price by specifying how far from the trigger price youll allow the sale of your stock to take place. This is called the limit offset.
Scenario 1: Price goes down
Step 1 The sell trigger
- A stock is trading at $80.00
- You choose a 5% trigger delta
- Your sell order will be triggered if the market price falls to $76.00 [$80.00 - 5% = $76.00]
Step 2 Sale at a limit price
- Your sell order is triggered at $76.00
- You chose a $1.00 limit offset
- The limit price for your sell order is $75.00 [$76.00 - $1.00 = $75.00]
Scenario 2: Price goes up
Step 1 The sell trigger
- The stock price increases to $95.00
- Your sell order is triggered if the market price falls to $90.25 [$95.00 - 5% = $90.25]
Step 2 Sale at a limit price
- Your sell order is triggered at $90.25
- You chose a $1.00 limit offset
- The limit price for your stock is $89.25 [$90.25 - $1.00 = $89.25]
With a limit order, youll sell all or part of your position at your limit price or better, or you wont sell at all. This protects you from selling into a market that is falling quickly, where your executed price could be much lower than your trigger price. However, the downside is that you may not sell at all, or only sell part of your position, and the price of the stock could move even lower. For example, in Scenario 1, if the price suddenly drops lower than $75.00 before your sell order can be filled, there will be no sale at your limit price.
How a buy order works
This is the reverse of the sell order. Youll look at the current market price of a stock and decide how much that price could rise before youd want to buy. This is your trigger delta:
- If the price rises 5%, I want to buy
- If the prices rises $5, I want to buy
Investors Edge calculates the price that will trigger your buy order, based on the stocks current market price. The trigger price is recalculated as the market price falls. The trigger price does not change when the market price rises.
Your buy order will be triggered as a limit order. You determine the limit price by specifying how far from the trigger price youll allow the purchase of your stock to take place. This is called the limit offset.
Scenario 1: Price goes up
Step 1 The buy trigger
- A stock is trading at $80.00
- You choose a 5% trigger delta
- Your buy order will be triggered if the market price increases to $84.00 [$80.00 + 5% = $84.00]
Step 2 Buy at a limit price
- Your buy order is triggered at $84.00
- You chose a $1.00 limit offset
- The limit price for your stock is $85.00 [$84 + $1.00 = $85.00]
Scenario 2: Price goes down
Step 1 The buy trigger
- The stock falls to $60.00
- Your buy order is triggered if the market price increases to $63.00 [$60.00 + 5% = $63.00]
Step 2 Buy at a limit price
- Your buy order is triggered at $63.00
- You chose a $1.00 limit offset
- The limit price for your stock is $64.00 [$63.00 + $1.00 = $64.00]
With a limit order youll buy all or part of your order at your limit price or better, or you wont buy at all. This protects you from buying into a market that is rising quickly, where your executed price could be much higher than your trigger price. However, the downside is that you may not buy at all, or only buy part of your position, and the price of the stock could move even higher. For example, in Scenario 2, if the price suddenly rises higher than $64.00 before your buy order can be filled, then there will be no buy at your limit price.
Learn how to complete a trailing stop limit order.