How to Use a Trailing Stop Limit on Questrade

What is a Trailing Stop Limit Order?
A trailing stop limit is a type of advanced order used to lock in profits or limit losses by adjusting your stop price as the market moves in your favor. Unlike traditional stop orders, a trailing stop limit follows the stock price at a fixed percentage or dollar amount, offering a flexible way to protect profits while minimizing downside risk.

Here’s how it works:

• Trailing Amount: You set a specific dollar amount or percentage as the “trail.” This amount dictates how far the stop price trails behind the current market price.
• Stop Price Adjustment: As the stock price rises, the trailing stop price moves up accordingly. If the stock price falls, the stop price stays the same.
• Limit Order Triggered: Once the stop price is hit, a limit order is placed to sell the stock. You can specify the lowest price (limit price) at which you’re willing to sell the stock.

For example, let’s say you buy a stock at $100 and set a trailing stop limit with a 5% trail. If the stock price increases to $110, the stop price will automatically adjust to $104.50 (5% below $110). If the stock price then drops to $104.50, your stop limit will trigger a limit sell order at that price or higher.

The Appeal of Trailing Stops on Questrade
In today’s fast-moving market, there’s nothing worse than missing the top of a price rally or getting stuck in a freefall. Questrade’s platform allows you to automate the process of exiting trades when prices reverse, while still giving your positions the flexibility to grow during favorable trends. By using a trailing stop limit, you're no longer glued to your screen watching every tick. The market is working for you—on autopilot.

But here’s the twist: not every investor understands how to set up trailing stops, or they misuse them, leading to missed opportunities or unnecessary losses. To avoid that, you need to understand both the mechanics and the strategy behind trailing stop limits.

Why Investors Misuse Trailing Stops (And How You Can Avoid It)

Trailing stop orders sound perfect on paper, but in practice, they can be tricky if used incorrectly. Let’s dive into some common mistakes:

1. Setting the Trail Too Tight
   One of the most frequent errors is setting a trailing stop that’s too close to the current price. Stocks, especially volatile ones, can swing up and down throughout the day. If your trail is too tight, a minor fluctuation can trigger the stop order, causing you to sell too early and miss out on further gains.
   Solution: Give your stop enough breathing room. If you’re dealing with a stock that moves wildly, you may want to set a looser trail, like 5-10%. For a more stable stock, you could tighten that up to 2-3%.

2. Forgetting to Set a Limit Price
   When the stop is triggered, it converts to a limit order. However, some investors forget to set an appropriate limit price. If the market drops too fast and your limit price is too optimistic, the order might never get filled, leaving you exposed to further losses.
   Solution: Make sure your limit price is reasonable. Setting it close to the current price ensures you’ll get out at a price you’re comfortable with, even during quick declines.

3. Not Monitoring Market Conditions
   A trailing stop can offer peace of mind, but that doesn’t mean you should set it and forget it. Market conditions change rapidly, and what worked yesterday might not work today. For instance, during periods of high volatility, you might want to adjust your trail percentage to account for wider price swings.
   Solution: Stay aware of market conditions. If volatility spikes, you may need to adjust your trail to avoid getting stopped out prematurely.

When Should You Use a Trailing Stop Limit?

• In Trending Markets: Trailing stops are especially useful in trending markets where prices are rising steadily. This allows you to ride the wave upwards while protecting your downside.
• To Protect Gains: If you’re holding a winning position and want to lock in some of those profits without fully exiting, a trailing stop is perfect. It lets your gains run while securing your profits if the market reverses.
• When You Can’t Monitor the Market Full-Time: Not everyone has the time or energy to watch the market all day. If you’re working or otherwise occupied, a trailing stop can serve as your exit strategy, ensuring you don’t miss out on profit-taking opportunities.

How to Set a Trailing Stop Limit on Questrade

Setting a trailing stop on Questrade is relatively straightforward, but you need to know the exact steps to execute it properly. Here’s a step-by-step guide:

1. Log in to Your Questrade Account
   Start by logging into your Questrade account and heading to the trading platform.

2. Select Your Stock
   Navigate to the stock or ETF you want to set a trailing stop for. Make sure you have an open position in that stock.

3. Go to the Order Entry Panel
   In the order entry panel, select "Sell" if you’re looking to exit a long position.

4. Choose Order Type: Trailing Stop Limit
   From the drop-down menu under order types, choose "Trailing Stop Limit." You’ll then be asked to enter two key pieces of information:

   • Trailing Amount (or Trail): This can be a dollar value or a percentage.
   • Limit Price: This is the lowest price you’re willing to accept if the stop is triggered.

5. Set Your Time in Force
   You can choose between "Day" and "Good-till-Canceled (GTC)." Day orders will expire at the end of the trading day, while GTC orders will stay active until you manually cancel them or they are triggered.

6. Review and Submit
   Double-check all the details, including the trail amount and limit price, to ensure everything is set up correctly. Once you’re confident, hit "Submit."

A Few Pro Tips

• Avoid the Pre-Market and After-Hours Pitfall: Trailing stops can be triggered during after-hours trading when liquidity is low and prices can swing wildly. To avoid this, you might want to adjust your orders before the market opens or during regular trading hours.
• Adjust Your Trail for Different Stock Types: Volatile stocks may require a wider trailing percentage to avoid being stopped out prematurely, whereas more stable stocks can handle a tighter trail.
• Use Trailing Stops in Combination with Other Strategies: While trailing stops are powerful, they shouldn’t be your only tool. Combine them with other strategies like dollar-cost averaging, diversification, or using options to hedge risk.

When to Avoid Trailing Stops

Not every situation is ideal for a trailing stop limit. If you’re trading in a range-bound market where prices fluctuate in a narrow band, a trailing stop can result in frequent stop-outs at inopportune times. In this case, a regular stop-loss or a different exit strategy might be more effective.

To sum it up, trailing stop limits are one of the most effective ways to automate your trading strategy on Questrade. Whether you're looking to lock in gains, limit losses, or free yourself from the stress of constant market monitoring, this tool gives you the flexibility and control you need.

But, like any tool, it requires a clear understanding and thoughtful execution to be used effectively. By avoiding common mistakes, adjusting your strategy to fit market conditions, and understanding the nuances of Questrade’s platform, you’ll put yourself in a position to trade smarter, not harder.

Now that you’ve got the blueprint, it’s time to put this strategy to work and see the results for yourself. The question is: Are you ready to stop leaving your profits to chance?