The trick is to NOT have the target set when using auto TDC. Counterintuitive, but here's a short step by step. The great in-detail and pretty tutorial with plenty of pictures was already posted by THEBERBSTER above.
Quick explanation:
You mark it once (spacebar). Then (if you've changed the appropiate map settings either via the options editor using the map options menu ingame) you'll see the torpedo solution line right on target (even if it's moving). Then, when you unlock the target (space again), the solution will immediately update and use the correct automatic values (all values will be filled in, and the line will be shown "in front" of the target, where the torpedo would intersect.
Change the torp speed setting to see the line and possibly the estimated time of impact change.
If you want to keep track of the targets, use the "follow contact" from the watch officer (IIRC) or just press X when aiming at the target. That will keep the periscope pointed at the center of the ship and will also continuously update the torp solution automatically. Great when waiting on the map for a target to move into perfect position.
tl;dr : Mark the target (spacebar), then unmark it (spacebar again). To keep the sight centered on target, press X.
If you're bothered by the target being identified as "unknown" (which also matters to see the draft depth of the ship visualized in the torp depth setting dialog), you can either identify it manually or use your officer to identify the target automatically. Remember this requires the appropriate TWoS-Submods to be activated as well as settings to be adjusted to work.
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