A Trailing stop is used to secure profits and limit losses as the market price moves favorably for the trader. As the market price changes, the stop-loss order value is adjusted to remain either at a % away of the current market price or at a fixed price difference in value.
Trailing stop limit order (TSLO) is similar to trailing stop but allows traders to specify a limit order on the stop loss instead of being transformed into a market order when the trigger is met.
Pros: Long-term holders can dynamically secure a long-term position without the need for active day trading. Trail Order is also usually not displayed to other traders on the public order books.
Cons: Establishing the ideal distance between the two points can be difficult. Conversion to a limit order may reduce traders’ chances to secure the order quickly based on market conditions.
Example:
You just bought ABC at $10,000 and plan to hold (hodl) it for a long period because you believe in a long term bullish market. However, you are not staying in front of the computer 24 hours a day and still want to prevent a fast market correction from erasing your profits.
- Set %: You set a trailing stop value at 10% (0.1). At the opening of the order, your stop-loss trailing order will then be fixed at $9,000 ($10,000 — $10,000 x 0.1). As the price of ABC goes up to $12,000, your 10% trailing stop follows and is now fixed at $10,800 ($12,000 — $12,000 x 0.1). Suddenly, a correction occurs and the price of ABC falls back to the $10,000 mark. When the market price reaches $10,800, your trailing stop order will automatically open into a limit order for $10,000 (sell at $10,800 or better price).
- Set value: You set a trailing stop value at $1,000. At the opening of the order, your stop-loss trailing order will be fixed at $9,000 ($10,000 — $1,000). As the price of ABC goes up to $12,000, your $1,000 trailing stop follows and is now fixed at $11,000 ($12,000 — $1,000). Suddenly, a correction occurs and the price of ABC falls back to the $10,000 mark. When the market price reaches $11,000, your trailing stop order will automatically open into a limit order (sell at $11,000 or better price).
Trailing stop limit is described here for a long position but also applies to short positions following the opposite logic.
Trailing stop limit orders pay maker fees and when triggered, are transformed into limit orders.
