We’ll examine both the Trailing Stop and Trailing Stop Limit order types, which have as their key component the trailing amount. For a long stock position, this trailing amount is a value beneath the prevailing market price. Study Notes:In this lesson, we’ll walk you through how to set up a Trailing Stop Limit order using TWS Mosaic.
Trailing Stop and Trailing Stop Limit OrderWe’ll examine the Trailing Stop and Trailing Stop Limit order types, which have as their key component the trailing amount. For a long stock position, this trailing amount is a value beneath the prevailing market price. Suppose you bought a stock some weeks ago, and it’s showing a nice profit. Even though you still expect its price to continue to rise, you want to do the prudent thing and run a stop just in case you’re wrong. The Trailing stop order can help. This type of order allows you to define a maximum loss on an open position, while allowing profits to run. What is a small difference between the Trailing and Trailing Limit order types? Just like with a regular Limit order, the Trailing Limit order will not execute at a price below the designated limit price. On the other hand, a regular Trailing Stop order becomes marketable when the stop price is triggered. Let’s first take a closer look at the Trailing Stop by showing you how we can set up an order on the TWS Mosaic platform. Creating Trailing Stop orders in TWS Mosaic From the Portfolio page in the Monitor window, we’ll select FB for Facebook. Since I’m long this stock, I will select to Sell it, then enter the amount of shares I want to sell. Once this is done, from the Order Type dropdown menu, you will see listed the TRAIL and TRAIL LIMIT types. For this example, we’ll select Trail.  The Order Entry panel now displays two additional fields – STP and TRAIL for the Stop and Trailing values, respectively. Because the Trailing amount will adjust higher, the Stop price should not be set lower than the value of the current market price of the stock less the Trailing amount. In fact, you do not have to enter a value in the Stop input field, which means that the Stop will activate should the market price fall to the distance below the share price at the time of entry by the value of the Trailing amount. In other words, a $50 stock with a Trail of $1, for example, would start to execute should it touch $49. In this example, *note that this is our stock’s current market price. Now, I’ll set a $1.00 Trail, but leave the Stop value alone. I am now ready to Submit this order and generate an Order Confirmation, which will display what we’ve set out to do – that is sell shares using a Trailing amount of $1.00. effectively activating a stop beneath the live market price by that amount. View the order details in the order tab within the Activity panel. The live order is displayed, and the Stop price is calculated as the market price less the Trailing amount when the order was transmitted. Should the share price rise, the stop price will also rise. But it will not fall when the share price declines. Should the share price fall to the stop price, it will activate a marketable order. Notice that as the share price increases, the live stop price also increases. This will continue until the order is either cancelled or until the share price falls by the Trailing amount to activate the stop. Now that we’ve covered the Trailing Stop, let’s take a look at the Trailing Stop Limit and how it differs. Let’s repeat the order entry, but this time instead of the TRAIL order type, we’ll select TRAIL LIMIT. To start, we’ll again select another long position from the Portfolio tab to populate the position in the Order Entry panel, select Sell, and then the number of shares we want to sell. From the Order type dropdown menu, this time, as we mentioned, we’ll select Trail Limit. This helps you add a layer of price protection so that your Stop order does not become a marketable order, should the stop trigger, and execute further away from the market than you expected. In the case of the Trail Limit order, to define a limit price, I will need to enter both Stop and Limit. The difference between the Stop and Limit price will be displayed as a Limit Offset on the Orders tab in the Activity monitor. For example, an order with a Stop price of $49.25 and limit price of $49.00 would have a Limit Offset of 25 cents. These two values move in lockstep – or trail the share price should it rise,but remain intact should it fall. The purpose of the limit offset is to create a minimum value that the stop order will execute at once the stop is activated. The stop is a function of the Trailing value. Upon transmitting the order, the stop price is system calculated, subtracting the trail amount from the market price at the time of execution. Should the share price fall by the amount of the trail, the stop is activated, but the execution is limited to the distance below the stop as determined by the limit offset. However, should the share price rise, the stop and limit prices will rise in tandem. Note: While our examples have focused on selling long positions using the Trail and Trail Limit order types, you can also establish buy stops on short positions, which act in precisely the opposite way. As there are a lot of moving parts to these order types, we urge you to refer to the study notes below this lesson for examples and try them on your own using a TWS paper account for simulated trading. This concludes our Order Types course. For more information, remember to look at the entire library of courses at Traders’ Academy under the IBKR education menu. Thanks for joining us. The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Supporting documentation for any claims and statistical information will be provided upon request. Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations. The order types available through Interactive Brokers LLC’s Trader Workstation are designed to help you limit your loss and/or lock in a profit. Market conditions and other factors may affect execution. In general, orders guarantee a fill or guarantee a price, but not both. In extreme market conditions, an order may either be executed at a different price than anticipated or may not be filled in the marketplace. |
