8 min readWhat is OCO in trading? First, let me ask you this: have you ever opened a trade only for an even better opportunity to present itself in the opposite direction? Well, you can take advantage of these types of market moves with OCO orders. Essentially, they are two limit orders that, when opened together, one is executed while the other is automatically canceled.
This allows you to set different entry and exit prices for multiple potential market movements. This can allow you to take advantage of multiple scenarios and help mitigate risk at different price levels.
You can use OCO orders with both stop loss order and take profit, depending on the outcome you are looking for. If you aren’t familiar, a stop loss order closes a trade that the market is moving against your position and take profit order closes a trade at a specific profit level.
Keep reading to find out how you can use One Cancels the Other OCO orders to optimise your trading, lower your risk, and seize potential profit.
Key takeaways
- One Cancels the Other OCO orders are two limit orders, where one cancels the other when the first is executed.
- OCO orders allow you to set two entry and two exit points when trading, allowing you trade a range of prices, not a single point.
- OCO orders can increase both opportunities and help with managing risk.
What is a OCO (one-cancels-the-other) order?
It is a type of conditional order that allows you to ‘connect’ two orders. When you place an OCO order, one cancels the other, and the primary order executes. And this is an extremely powerful way to trade, as in most cases, significant price breaks or movements happen between a range of prices, not at a single level.
How are OCO orders valuable?
Why is this important or valuable? Because a limit order is only executed at a specific price, not a range, even though price changes usually happen within a range. Setting two levels, one at the top of the range and one at the bottom, can increase your potential opportunity and help you manage your risk more effectively.
How do OCO orders work?
When you place a simultaneous limit order, and the first limit price is reached, the second limit order is automatically canceled. An OCO order is used both to seize opportunity with the use of the primary order, while the second order is automatically canceled when you no longer need to manage risk within that range.
Usually technical analysis will yield or plot a trading range where a price change will occur. Depending on your order, this change in value can be beneficial or increase your exposure. An OCO order can help you by setting a sell stop or a sell order, to avoid, or take advantage of these movements.
Types of OCO orders
An OCO order can be used for multiple markets including Forex, Commodities, and even Cryptos.
Additionally, an OCO order can be used for risk mitigation or to take advantage of market moves depending on how the order is executed. For risk management, you could open two stop or limit price orders, within the range you’d consider your maximum risk appetite is, if the price of the asset is moving between these two values.
For an OCO order that is going to be executed in your favour, you would open a primary buy order and a secondary order or the second buy order, when the market price is moving between the two. Whichever occurs first, it will be executed on the market, cancelling the other.
This tool can be especially useful when using retracement strategy, which takes advantage of small price retracements during strong trends. In this scenario you can use conditional orders two ways, keep a trade open on the primary trend, while setting up a sell or a buy order at a predetermined price level. If the price goes below, it will trigger the sell order netting you some profit, while it cancels the other order. You could also lock in your profit with a take profit order.
Depending on the market conditions you may also see the need a corresponding stop order which can also be an OCO order (i.e. executing a stop order below, while cancelling the take profit order above the price level).
What are the benefits of OCO orders?
Risk management
Using a stop loss order when trading is always recommended, but with an OCO order, you can set a primary sell limit order and a secondary one. This can help you define a range of prices, or once it hits the trigger price, can execute a sell order to short the asset you are trading. This allows you to “hedge” or counterbalance the risk of a trade that’s already open.
You can also use OCO orders to open a trade at a predetermined price level while canceling a take profit level simultaneously. This would help you protect an open trade from reversal without having to close it with a take profit limit.
It is also useful when using a breakout strategy. This is when a price is seemingly ready to break out above resistance or below support and continue its overall trend.
Trading efficiency
Ideally, an OCO order can help you automate your trading without the need for constant market monitoring. You can use conditional orders to go long and short at the same time. You can also use take profit levels simultaneously while having a stop loss order active, without excluding the other, until the price hits a specific level.
If all of your trades are set up like this, using the right amount of analysis, you can trade like you would on an automated trading platform.
Common pitfalls and tips of using OCO
This is pretty much universal, but overconfidence can be catastrophic. Especially when using something as hands off as OCO, where orders are automatically executed and automatically cancelled.
Conclusion
This OCO order type, which cancels the other order when the primary one is executed, can be a powerful way to trade ranging markets, or markets that are the verge of a trend change. When combined with other trading tools like technical indicators, a refined knowledge of the markets, and a well-structured trading strategy, OCO orders can be beneficial for traders regardless of the asset being traded.
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