What Is a Cash Trigger?
A cash trigger is a condition that triggers an investor to make a trade or make a specific move, like buying or selling a financial product like a stock, option, futures contract, bond, or currency. Willful cash triggers are generally common among retail investors. They include deciding to make a purchase if a stock transcends a predetermined price, or selling a stock on the off chance that it falls below a specific price.
Market-forced cash triggers can happen on over-the-counter options, when a transaction or action is taken, or when the price of an asset arrives at a certain level.
How the Cash Trigger Works
A cash trigger is a price at which an investor makes a move. Traders frequently put out orders at these levels, so that when the price arrives at a predetermined level, they can enter or exit a trade.
For instance, on the off chance that a trader is long a stock at $20, however needs to escape the trade if the stock falls below $15, they could put a stop-loss order at $15. The stop-loss order gets them out of the trade on the off chance that the price dips under $15, with $15 being the trigger price as well as the order price in this case.
It's important to note, nonetheless, that the transaction turns into a market order once the stop-loss trigger is enacted. This means that the genuine sale price could happen below your trigger point. This turns out to be particularly important with unstable stocks or extreme market volatility on the grounds that the sale price could wind up being essentially below the stop trigger.
Essentially, in the event that a trader has been watching a stock begin to move higher after a prolonged decline, they might choose to buy the stock, yet provided that it continues to transcend a prior top. On the off chance that the former price top was $60, the trader could place a stop buy order just above $60. The order won't fill until the price moves above $60. The cash trigger is $60, however in this case, it is additionally where an order can be placed.
These are alluded to as cash triggers since they bring about an inflow or outflow of cash from the account.
A few investors decide to set cautions instead of orders at cash trigger levels. In the case above, instead of placing an order the investor may just watch the price and afterward execute a trade physically at the cash trigger level.
Other Types of Cash Triggers
Another type of cash trigger is available in knock-in or knock-out options, for instance. These are financial products where something specific happens on the off chance that a specific price is reached.
In a knock-in option, the option possibly appears on the off chance that the underlying asset arrives at the knock-in price. This could result in extra premiums being paid and new obligations or rights on the new option.
In a knock-out option, the option fails to exist on the off chance that the underlying asset contacts the knock-out price.
Such products trigger something when a specific price is reached. Not at all like the other deliberate cash triggers referenced over, these types of triggers are incorporated into the product.
- There are numerous kinds of triggers traders can set for their trades, for instance, stop-loss orders and stop-buy orders.
- A cash trigger is called that since it is an action, similar to a trade, that is triggered and adds cash to your trading account.