How does Trailing stop works?

Discussion in 'Order Execution' started by freewilly, Oct 1, 2006.

  1. New in trading. Want to ask few basic questions on trailing stop orders.

    1. For stock A, the current price is $19.00, I entered a 0.10 as stop parameter for sell orders. If the stock goes up to 19.4 and then pulls back to 19.30, (it is down 0.10 from last peak 19.40), so the stock will be triggered, and will be up for sale automatically. Is it corect?

    2. Once the stock is triggered for sale, it becomes a market order, not a limit order. Is that right?

    3. Do you guys use trailing stop order for day trading? If so, what is the sopt parameter ( by points of percentage) you'd like to use?


  2. Whoa. Thats actually a long and complex question to answer.

    Keep in mind the volume when trading. If there is lots of volume, then its easier to make both an entry and an exit.

    So for trailing stops, imagine a low volume stock and suddenly a market order appears. It blows right through the bids one by one. So lets say you set 1000 shares for 19 dollars and then it becomes a market order. A few hundred might actually trade at 19, but then beneath it are several other bids that it will hit soon. Maybe another hundred or two executes at 18.80 and so on.

    There are many types of stops. Stop trail, stop trail limit, stop limit and stop just to name a few. Their names suggest how they execute.

    Setting the stop is an art because all the traders out there know that your going to set it. They will use these stops as an advantage. Lets say, for example, an institutional trader dumps a nice market order block. Then it takes the stock way down as it activates all the stops along the way. Then the institution can accumulate more on the way up because it set off all those neat stops.

    So your basically going to have to sit-down, strategize and plan the different outcomes. Each stock is different in the way you set stops. There are certain stocks a stop trail will be in order others a stop trail limit will be in order. Look at all the different factors and strategize. . .
  3. Hi, Eagle,
    Thanks for the reply, it is really nice to know those things.

    However, my original questions remain unanswered. Is it true that once the trailing stop order is triggered, it becomes a market order? If so, it maybe dangerous.

    Also, what does it trailing to? Does it use the highest price of closing prices of previous days, or it uses te highest intraday price?


  4. He did answer you -- it depends on the type of order you use (for example trailing stop versus trailing stop limit), and your broker and how they execute that type of order. Look at the help on the IB home page for info on how they handle it. Some brokers only offer trailing stop market orders, others offer more complex order types.

    You're right it can be dangerous but as he said you need to evaluate it stock by stock. On a liquid stock/ETF like QQQQ or SPY you'll be fine with a market order, but on something less liquid you can see significant slippage.
  5. Lucre


    yes. sell/buy stop orders become market orders when the price trades below/above them
    sell/buy stop limit orders become limit orders when the price trades below/above them.

    In an effort to get your orders, exchanges and brokers provide other features, like the ability for the stop to trail, or one closing order cancelling another when executed, etc.

    here's a good place to start:
  6. Thank you all. Got it!