A trailing-stop order is a type of order that triggers a market order to buy or sell a security once the market price reaches a specified percentage or dollar trailing amount that is below the peak price for sells or above the lowest price for buys.
The price at which this order type will execute is continuously reset to a higher value if you enter a trailing-stop sell order and the bid price rises. Similarly, the price at which this order type will execute is continuously reset to a lower value if you enter a trailing-stop buy order and the ask price lowers.
Let's use an example to explain:
If you own XYZ, shares which are trading at $40 per share, and place a trailing-stop order to sell the shares by entering the trailing amount to $0.50 per share, a sell order will be executed when the price of XYZ shares falls to $39.50 per share [$40 (bid price) - $0.50 (trailing)]. If the price of XYZ shares rises to $41 per share and the order is still valid, the stop price will be set to $40.50 [$41 (current price) - $.50 (trailing)].
When you select a trailing- stop order, the stop price in the Order Entry window doesn’t apply and is disabled. The limit price field will be replaced by the trailing field and a value will need to be entered. The trailing amount cannot be negative. You can select a dollar or percentage value by clicking the Dollar or Percentage icons.
- A trailing-stop order is triggered by the last trade, not the bid or ask price
- The duration type of good till extended market (GTEM) cannot be used for trailing-stop orders. Learn more about order durations.
- Trailing-stop orders are not allowed on Canadian exchanges.