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.

RELATED TERMS
  1. Injury-In-Fact Trigger

    Injury-in-fact trigger is a coverage trigger theory that states ...
  2. Triggering Event

    1. A tangible or intangible barrier or occurrence that, once ...
  3. Scale Order

    A type of order that comprises several limit orders at incrementally ...
  4. Triggering Term

    A triggering term is a word or phrase that when used in advertising ...
  5. Day Order

    An order to buy or sell a security that automatically expires ...
  6. Trading Strategy

    A set of objective rules designating the conditions that must ...
Related Articles
  1. Trading

    Pinpoint Entry Points With Filters and Triggers

    These tools will help you enter at high-probability points within your set strategy.
  2. Personal Finance

    A day in the life of a day trader

    Day trading has many advantages, and while we often hear about these perks, it's important to realize that day trading is hard work.
  3. Trading

    Using Technical Indicators to Develop Trading Strategies

    There is no perfect investment strategy that will guarantee success, but you can find indicators and strategies that will work best for your position.
  4. Trading

    The 10 Worst Mistakes Beginner Traders Make

    Traders generally buy and sell securities more frequently and hold positions for much shorter periods than investors, which can result in costly mistakes.
  5. Trading

    Day Trading: An Introduction

    This article takes an objective look at day trading, who does it, and how it is done.
  6. Trading

    Day Trading for Beginners

    Interested in day trading but don't know where to start? Here are some common day trading strategies, as well as some day trading tips for beginners.
RELATED FAQS
  1. The difference between a market order and limit order

    Market orders execute a trade to buy or sell immediately at the best available price. A limit order only trades when the ... Read Answer >>
  2. Why do limit orders cost more than market orders?

    Learn the difference between a market order and a limit order, and why a trader placing a limit order pays higher fees than ... Read Answer >>
  3. Can a stop-loss order be used to protect a short sale transaction?

    The quick and simple answer to this question is yes. The major difference between the stop-loss order used by an investor ... Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center