Trade Trigger

DEFINITION of 'Trade Trigger'

A trade trigger is any type of event that triggers a security or a set of securities to trade. A trade trigger is usually a market condition, such as a rise or fall in the price of an index or security, that triggers a sequence of trades. Trade triggers are used to automate certain types of trades, such as the selling of shares when the price reaches a certain level.

BREAKING DOWN 'Trade Trigger'

Trade triggers help traders automate their entry and exit strategies. Often times, trade triggers refer to contingent – or one triggers other (OTO) – orders involving both a primary and secondary order. When the first order executes, the second order is triggered automatically and becomes active for execution depending on any further conditions. Trade triggers may also be used to place individual trades based on the price or external factors.

Trade Trigger Example

Suppose that a trader wants to create a covered call position. The trader may place a limit order to buy 100 shares of stock and, if the trade executes, sell a call option against the stock that was just purchased. By using trade triggers, the trader doesn’t have to worry about watching for the first order before manually placing the second trade. The trader can be confident that both orders were placed at the right prices.

Traders may also want to use the proceeds from a sale to make a purchase. For example, a trader may place a limit order to close out an option position and setup a trade trigger to use the proceeds to purchase a different option contract. The trader doesn’t have to worry about the timing of the second trade and can instead focus on identifying new opportunities.

Finally, trade triggers may be used to add a leg to a strategy. For example, a trader may place a limit order to buy a put and have a contingent limit order to sell a put. This strategy can help traders create a complex option strategy without executing individual trades, which reduces the risk of placing the wrong trades or waiting too long to open or modify a trade.

Risks to Consider

Trade triggers may be helpful in automating entry and exit strategies, but traders should exercise caution when using them. After all, it’s easy for traders to forget about positions created more than a day ago and the execution of old trading ideas can lead to losses.

Traders should be sure to revisit any open trade triggers at the end each day and consider only using day-long orders for setting up these strategies rather than good-til-canceled or other longer order types.

The Bottom Line

Trade triggers automate the process of buying and selling securities based on a set of criteria. Often times, traders will use trade triggers to place compound orders that rely on a series of conditions to be met. Traders should ensure that their trade triggers remain relevant over time.