What is a Trade Trigger?

A trade trigger is any event that meets the criteria to initiate an automated securities transaction that does not require additional trader input. A trade trigger is usually a market condition, such as a rise or fall in the price of an index or security, which 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.

Understanding Trade Trigger

Trade triggers help traders automate their entry and exit strategies. Often, trade triggers are placed using contingent 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. For example, traders can straddle the current market price by placing an one-cancels-other (OCO) order where the execution of one side will immediately cancel the other, thus allowing the trader entry to the market, hopefully in the direction with momentum.

Key Takeaways

  • A trade trigger is any event that meets the criteria to initiate an automated securities transaction that does not require additional trader input.
  • Often, trade triggers are placed using contingent orders involving both a primary and secondary order.
  • By virtue of implementing guidelines identified by the trader, trade triggers can add a discipline component to the trading process.

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 set up 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.

Trade Trigger Pros and Cons

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-till-canceled or other longer time frame order types.

By virtue of implementing guidelines identified by the trader, trade triggers can add a discipline component to the trading process. Often, 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.