This tool is basically the same as Trace by Rectangle, with a different way of defining the trace area. The selection area is sized by the Aperture field, which is the length of each side of a square whose center is represented by crosshairs.
Using the same example picture as for Trace by Rectangle, place the cursor at the center of the desired selection area.
The results are the same - all objects within the area will be traced.
If Nearest Graphic Only is active, then only the object closest to the crosshairs will be traced.
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