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Trade Trigger Definition Explained for Beginners

A trade trigger is an event that configures a trade in motion in reference to an underlying asset. Mainly used by stock traders, it can also be very useful for those who target indexes or options. There can be several trade trigger types. For example, it can represent an individual stock movement. At the same time, it can depict a market-wide action when targeted indexes reach or exceed a pre-set level.

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In this article, we will define major trade trigger types and examples to see how investors can benefit from using them. Additionally, we will review the major pros and cons to decide whether the approach is worth using.

What Is a Trade Trigger?

As stated earlier, a trader trigger is a specific event that is supposed to meet certain market conditions and pre-set criteria. It can be used as an automation tool to launch a trade (transaction) that does not call for extra input or manual involvement.

In simpler words, a trade trigger is when the market reaches specific conditions such as security or index price drop/rise. When these conditions are met, a sequence of trades is launched. Investors use the technique to set automated trades of certain types. For example, one can use it to automatically sell/buy an asset once the price has reached a certain level.

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Key features to consider:

  • A trade trigger happens only when the market meets specific criteria.
  • It initiates automated transactions when pre-set conditions are met.
  • The technique does not call for extra trade input.
  • It launches both primary and secondary orders.
  • Using a trade trigger can add an extra discipline component to the trading strategy.

Reasons to Use Different Trade Trigger Types

Depending on the type of a trade trigger, investors can use the technique to automatically set optimal market entry and exit positions. Experienced traders use the tool to place contingent orders. When the first order has been executed, the second one is launched automatically. It stays active unless certain pre-set market conditions are met.

Trade trigger examples: let’s say, you want to place an OCO order to straddle the running asset price. Once one side of the order has been executed, the other one will be automatically canceled right at once. At the same time, a trader will still have an opportunity to enter the market following the momentum direction.

Trade Trigger Types

A type of trade trigger depends on the asset you invest in. Besides, it can also depend on a set of conditions and criteria to meet. Here are some of the most popular trade trigger types:

  • Stock trade trigger – generally associated with the stock price movement, a stock trade trigger is launched once the price has reached a certain level. As a rule, it comes with an attached time saying “this order is good-till-cancelled” or “this order is good for the day”. At the same time, investors can benefit from more sophisticated approaches by having a trade trigger set in motion. This is where you are free to express your creativity, set different levels, and use trade triggers once you’ve spotted a good opportunity for your preferred asset.
  • Index trade trigger – indexes can also be used as triggers to execute a trade either with a long or short position. A trigger can be set up if you feel like an index movement can affect or correlate the stock movement in one way or another. All you need is to set preferred conditions or even complete a transaction (for example, sell a stock when the Dow goes up to reach a preset level).

The Bottom Line

On the one hand, using a trade trigger can be a great tool to complete or launch automated trades. However, like with any other investment technique, you need to be very careful when using this specific tool. A common mistake is forgetting about earlier positions and trading ideas, which may result in unexpected losses.

A good idea is to revise older positions. Besides, it is recommended to focus on day-long orders when utilizing the concept of trade triggers. Longer time frames may not let you configure a successful trading strategy. If used properly, the modality can help you create an automated order system with preset conditions that can stay relevant over a long time.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.