A Questrade trailing purchase order is an advanced buy order that automatically adjusts its trigger price as the market price of a security moves in a favorable direction. It's used to potentially capture an "upswing" in price while limiting risk if the price reverses. Essentially, it's a stop-limit order where the "stop" price (the trigger) is not fixed but moves along with the price. Questrade's learning platform explains.
Here's a more detailed explanation:
Trailing Offset:
You set a "trailing offset," which can be a percentage or a dollar amount. This offset determines how far below the current market price your buy order will be triggered.
Favorable Movement:
If the market price moves in the direction you want (e.g., an upward trend), the trigger price for your buy order moves up as well, maintaining the set offset.
Adverse Movement:
If the market price starts moving against you (e.g., declining), the trigger price stops moving, and your order will execute if the price reaches your trigger price.
Example:
Let's say a stock is trading at $50, and you set a trailing stop buy order with a 5% offset.- If the stock price rises to $55, your trigger price will be $52.38 (5% below $55).
- If the price then rises to $60, your trigger price will be $57.14 (5% below $60).
- If the price then drops to $55, your buy order will trigger at $52.38 (because the trigger price has stopped moving down).
Key Differences from a Regular Buy Limit Order: Dynamic Trigger:
Unlike a buy limit order, where the trigger price is fixed, a trailing stop buy order's trigger price moves along with the price movement.
Risk Management:
Trailing stop buy orders are primarily used to manage risk and potentially capture upward price momentum, while a limit order is used to buy at a specific price or better.
- Catching Upswings: When you anticipate a stock's price will rise after a period of decline.
- Short Positions: To limit potential losses on short positions if the price of the shorted stock begins to rise.
- Automated Trading: To automate your buy orders and take advantage of market movements without constant monitoring.
- Trailing stop buy orders are typically available on advanced trading platforms like Questrade Edge platforms.
- The order duration also needs to be set (e.g., Day, Good 'Til Canceled).
- Once triggered, a trailing stop buy order becomes a market order or a limit order (depending on the platform).
