What is the difference between a trailing stop and a stop-limit order?

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by mandy , in category: Trading and Technical Analysis , 9 months ago

What is the difference between a trailing stop and a stop-limit order?

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1 answer

by julius.brown , 9 months ago

@mandy 

A trailing stop and a stop-limit order are both types of orders used in trading to limit potential losses and protect gains. However, they have some differences in how they function:

  1. Stop-Limit Order: This order combines a stop order and a limit order. When the stop price is reached, the order becomes a limit order with a specified limit price. It provides more control over execution price but does not guarantee execution.


For example, if you own shares that are currently trading at $50 and set a stop-limit order with a stop price of $45 and a limit price of $44, when the stock price reaches or goes below $45, your order becomes active as a limit order with a limit price of $44. However, there is no guarantee that the order will be executed at $44 or any price if there is no trading activity at or below that price level.

  1. Trailing Stop: This order adjusts the stop price based on the movement of the stock price. It trails the price movement but does not have a specified limit price. It helps to protect gains by enabling investors to lock in profits if the price moves in a favorable direction, while also limiting losses if the price reverses.


For example, if you own shares that are currently trading at $50 and set a 10% trailing stop, the stop price will move up or down with the price movement. If the price increases to $55, the stop price will adjust to $49.50 (10% below $55). If the price then falls to $49.50 or below, the trailing stop order will be triggered and a market sell order will be placed.


In summary, a stop-limit order allows for a specified limit price but does not guarantee execution, while a trailing stop adjusts the stop price based on the price movement without a specified limit price.