A trade trigger is a precise event that tells you to get into or out of a trade, right now. It helps avoid getting in or out too early, too late, skipping trades, or taking trades you shouldn’t.
You need a trade trigger in real-time to let you know right now is the time to act. It is a precise event that triggers your action. Until that time, you have done your analysis but there is no action yet. It also should be visible on historical charts, so that you can backtest and verify if the trade trigger (and your strategy) works.
Without a trade trigger you may delay entry, take trades too early, skip trades, or take trades that aren’t part of a strategy. A trade trigger is your call to action, and tells you to sit on your hands if there is no trade trigger.
Creating Trade Triggers
Trade triggers can be simple or complex. One isn’t necessarily better than the other, it just depends on the strategy we want to use. The trader trigger is a part of the strategy.
A strategy without trade triggers is based on whim. You buy and sell when you feel like it, but those actions aren’t necessarily based on a proven winning method. A strategy, with trade triggers, can be tested for profitability, it can be replicated, and it can be tweaked to improve performance. Trades based on whim can’t do those things.
There are potentially many ways to create trade triggers, for the entry and exit. Here are a few examples.
- Make a trade at a specific time of day, day of the week, or day of the year. At the open or close.
- Make a trade when an indicator reaches a certain level.
- Make a trade when one indicator crosses another.
- Make a trade when the price crosses an indicator on the chart.
- Make a trade when the price reaches a certain price or percentage move (common with stop losses).
- Make a trade when a price bar closes.
- Make a trade when the price moves outside a price pattern, such as a consolidation, triangle/contraction, rectangle, head and shoulders, and so on.
- Make a trade when a fundamental or economic data point reaches a certain level.
- Make a trade when one of the above signals occurs, but then fails. This is called a false breakout or failed signal.
These could be combined. For example, you may only take a trade between 8 am and 9 am, and only if one moving average crosses another. In this case, the time frame becomes a qualifier, and the moving average is the trade trigger. The time period has to be in effect, and if it is, then the moving average is the only thing that can trigger the trade.
This example could be altered by also waiting for the price bar to close. Now the close of the price bar becomes the trade trigger, assuming the other two qualifiers (time and moving average crossover) are still in place.
Profit targets (or a pre-established method of taking profit) and stop losses are pre-established trade triggers, because that is where we want to exit.
Examples of Trade Triggers
Assume a trader likes to trade breakouts from chart patterns. They initiate a trade when the price breaks out of the pattern. They also need a trade trigger for getting out, both with a profit or a loss.
The chart shows a simple example of this. A triangle forms on this 15-minute EURUSD chart. The trader enters as the price moves above the identified pattern.
A stop loss is placed below the last swing low of the triangle.
A target is placed above the triangle. In this case, it is placed at an equal distance to the height of the triangle. The triangle is 13 pips high at its thickest point, and so the profit target goes 13 pips above the breakout point.
Charts from TradingView.
This is the conventional way chart patterns are traded.
It is up to the trader to then determine their proper position size. They may also wish to add in additional rules; they may only trade certain patterns, or only patterns that breakout in the current trend direction, for example. All such rules are written down in a trading plan.
Indicator Trade Trigger
Here’s another trade trigger example, using indicators. Assume the trader has several qualifiers. These are things that need to be in effect before a trade can trigger.
Here are their qualifiers for a trade entry:
- It is during the US trading session.
- A 5-minute chart is used.
- The 5 period EMA crosses the 9-period EMA in either direction.
- A 5-minute price bar must close above both moving averages in the event of an up cross, or below both moving averages in the event of a down cross (from step 3).
- Average true range (ATR) is greater than 6 pips.
A trade is taken immediately after the close of the 5-minute price bar if the qualifiers are met.
The maximum stop loss is 2 x ATR, placed at the outset of the trade.
- Trailing stop loss. For example, on a long trade, exit on the first candle close below the 5 or 9-period moving average (pick one).
- Let the price run at least 1XATR before exiting. In other words, the trailing stop loss doesn’t kick in until the price has moved favorably at least 1ATR.
Here’s an example of a trade using this method.
This is an example strategy to highlight trade triggers. It is not a strategy I have extensively tested. This type of strategy will rely on a number of big winning trades to make it profitable since there will likely be some trades where the profit is smaller than the risk.
Stock Trade Trigger Example
Let’s look at a stock trading example. I love trading consolidation breakouts, especially with other qualifiers. I often trade contraction patterns which have specific qualifiers. A consolidation needs to develop in the correct spot. When the price breaks above the consolidation it triggers a long trade.
Here is an example where a stock formed the correct contraction pattern, the consolidation was in the right spot, and the price broke above the consolidation.
A move outside the consolidation triggers an order to be placed. In reality, I place a buy order above the consolidation before it breaks out. Because if it moves above the consolidation I want to be in the trade. On this trade, there is a gap above the consolidation, but the price pulled back during the breakout day, providing an opportunity for that buy order just above the consolidation to fill. The price then proceeded to go higher (won’t always happen, and sometimes the price gaps above an entry and doesn’t fill it).
To complete the strategy, a stop loss is placed just below the consolidation, and a profit target is placed based on how the stock has recently moved, as described in Setting Profit Targets.
My Most Common Trade Triggers
My most common trade triggers are consolidation breakouts. See How to Day Trade with a Trend Strategy or the Swing Trading Trend Channel Strategy for more examples. I do my analysis, I wait for the price to get near an area I want to trade, and then I wait for the price to move sideways for at least three price bars. Then, I only enter if the price moves outside that consolidation in the direction I want to trade in. A stop loss goes on the other side of the consolidation.
Historically I have used very few technical indicators. I personally like trading based on price action, and using price action trade triggers. But indicators can be used as well.
By Cory Mitchell, CMT