A trailing stop limit is a conditional trading order that tracks the market price of an asset by a set distance and converts into a limit order once the stop price is reached.
Understanding trailing stop limit orders
This order type combines the functions of a trailing stop and a stop limit order. Elephants use this tool to manage downside risk while maintaining open positions during favorable price movements. The order requires the trader to define two primary variables. The first is the trailing amount, which is set as either a specific monetary value or a percentage. The second is the limit price, which establishes the boundary price for execution once the order is triggered.
As the market price of the asset moves in a profitable direction, the stop price moves alongside it at the defined trailing distance. If the market price reverses direction, the stop price remains stationary. When the market price touches the stop price, the order is triggered. Unlike a standard trailing stop, which becomes a market order upon triggering and executes at the next available price, a trailing stop limit becomes a limit order.
Traders utilize this structure to control the execution price in volatile markets. Because the triggered order is a limit order, the trade will only execute at the specified limit price or better. This prevents slippage, which is the difference between the expected price of a trade and the actual execution price. The inherent risk with this order type is that the trade might not execute at all. If the market price gaps down past the limit price before the order is filled, the position remains open.
Example
Suppose an Elephant holds shares in a global agricultural logistics company currently trading at 100 per share. The Elephant places a sell trailing stop limit order with a trailing distance of 10 and a limit price offset of 2. At the time the order is placed, the stop price is 90.
The stock price rises to 120 over the next week. The stop price trails behind it and moves up to 110. The stock price then reverses and falls to 110. This price action triggers the order. Upon triggering, a limit order to sell is automatically submitted to the market at 108, calculated by taking the 110 stop price and subtracting the offset of 2.
The Elephant will now sell their shares for exactly 108 or higher. If the market price suddenly drops to 105 due to a rapid selloff, skipping the limit price entirely, the limit order remains open and the shares are not sold. The Elephant retains the shares until the market price recovers to at least 108 or they manually cancel the order.