Trade Trigger: Meaning, Overview, Pros and Cons

What is a Trade Trigger?

A trade trigger is an event that initiates an automated securities transaction without additional input. It is typically 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 automate certain types of trades, like selling shares at a specific price.

Key Takeaways

• A trade trigger is an event that initiates an automated securities transaction without additional input.
• Trade triggers often use contingent orders with a primary and secondary order.
• Implementing guidelines identified by the trader adds discipline to the trading process using trade triggers.

Understanding Trade Trigger

Trade triggers automate entry and exit strategies for traders. They use contingent orders with both a primary and secondary order. When the first order executes, the second order is automatically triggered and becomes active based on further conditions.

Trade triggers can also be used to place individual trades based on price or external factors. For example, traders can straddle the market price by using a one-cancels-other (OCO) order. This allows the trader to enter the market in the direction with momentum.

Trade Trigger Example

Suppose a trader wants to create a covered call position. They can place a limit order to buy 100 shares of stock and, if the trade executes, sell a call option against the purchased stock. Using trade triggers eliminates the need to manually place the second trade after the first order executes.

Traders may also want to use sale proceeds for a purchase. For instance, they can 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. This allows traders to focus on identifying new opportunities.

Trade triggers can also be used to add a leg to a strategy. For example, a trader can place a limit order to buy a put and have a contingent limit order to sell a put. This strategy helps traders create a complex options strategy without executing individual trades, reducing the risk of placing incorrect trades or waiting too long to open or modify a trade.

Trade Trigger Pros and Cons

Trade triggers automate entry and exit strategies, but caution is advised when using them. Traders may forget about positions created more than a day ago, leading to potential losses. It is important for traders to review open trade triggers daily and consider using day-long orders instead of longer time frame order types.

Implementing guidelines identified by the trader adds discipline to the trading process using trade triggers. Traders often use trade triggers for compound orders that rely on a series of conditions. It is crucial for traders to ensure their trade triggers remain relevant over time.