A trailing stop limit order is designed to allow an investor to specify a limit on the maximum possible loss, without setting a limit on the maximum possible gain. A sell trailing stop limit moves with the market price, and continually recalculates the stop trigger price at a fixed amount below the market price, based on the user-defined "trailing" amount. The limit order price is also continually recalculated based on the limit offset. As the market price rises, both the stop price and the limit price rise by the trail amount and limit offset respectively, but if the stock price falls, the stop price remains unchanged, and when the stop price is hit a limit order is submitted at the last calculated limit price. A buy trailing stop limit order is the mirror image of a sell trailing stop limit, and is generally used in falling markets.

The idea behind a trailing stop order is to have the order follow a stock's price as it rises. Your trailing stop order’s trigger sell price, or Stop Price, is re-calculated upwards each time a new closing high is reached. If the stock's price begins to fall and reaches your calculated stop price, your order will be triggered as a market order and your stock will be sold for the best available price.

By following a stock's price as it climbs and triggering a sell order if the price falls below your specified threshold, a trailing stop allows for the potential of greater gains, versus relying on a strategy that locks in gains once a firm or "hard" price is reached.