Last Updated: January 22, 2025
The trigger price (also called activation price or stop level) is the predefined price point that converts a stop-loss order from a passive instruction to an active market order.
How Trigger Prices Work
Key Mechanism
- Trigger Price: The threshold that activates your stop-loss order.
- Execution: Once reached, the order is sent to the exchange but may not fill at the exact trigger price due to market volatility.
Example Scenario
If you set a stop-loss trigger at $25 for a stock currently trading at $30:
- When the stock drops to $25, the order becomes active.
- The final execution price could be $24.95 or $25.05, depending on liquidity.
Trigger Price vs. Stop-Limit Price
| Feature | Trigger Price | Stop-Limit Price |
|------------------|-----------------------------|--------------------------------|
| Order Type | Activates a market order | Activates a limit order |
| Price Control| No guaranteed price | Sets a minimum/maximum execution price |
| Use Case | Fast execution | Price precision |
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Optimal Stop-Loss Strategies
1. Percentage-Based Stop-Loss
- Recommended Range: 15–20% below the purchase price.
- Purpose: Balances risk tolerance with market fluctuations.
2. The 2% Rule
- Rule: Never risk more than 2% of your trading capital on a single trade.
- Calculation: For a $50,000 account, maximum loss per trade = $1,000.
3. The 7% Rule
- Action: Sell immediately if a stock falls 7–8% below your entry price.
- Rationale: Prevents emotional decision-making during downturns.
Price Triggers Explained
Definition
A price trigger is the threshold at which the exchange processes your buy/sell order. It’s the "if-then" condition for trade execution.
Practical Application
- Buy Order: Triggers when the stock rises to a specified price.
- Sell Order: Triggers when the stock falls to a specified price.
FAQs
1. What happens after a trigger price is hit?
The order is sent to the exchange but may execute at a slightly different price due to market speed.
2. Should the trigger price exceed the limit price?
- Buy Orders: Limit price ≥ trigger price.
- Sell Orders: Limit price ≤ trigger price.
3. Is a stop-loss necessary daily?
Yes. Automated stop-loss orders eliminate the need for constant monitoring.
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4. What’s the best stop-loss strategy?
- Percentage Rule: 10–20% below buy price.
- Volatility-Based: Adjust based on the stock’s average volatility.
5. How is stop-loss calculated?
For a stock bought at $100 with a 10% stop-loss:
Stop-Loss Price = $100 – (10% × $100) = $90.
Key Takeaways
- Trigger prices activate orders but don’t guarantee execution prices.
- Combine stop-loss and stop-limit orders for better control.
- Adopt rules like the 2% or 7% to manage risk systematically.
Stick to these principles to enhance trading discipline and protect your portfolio.