Understanding One-Cancels-the-Other (OCO) Orders
Let me explain what a one-cancels-the-other (OCO) order is: it's a pair of conditional orders where if one executes, the other gets automatically canceled. You'll often see an OCO order combining a stop order with a limit order on an automated trading platform. When the stop or limit price hits and the order goes through, the platform cancels the other one right away. As an experienced trader, I use OCO orders to cut down on risk and get into the market effectively.
OCO orders stand in contrast to order-sends-order (OSO) conditions, which actually trigger a second order instead of canceling it.
Key Takeaways on OCO Orders
- One-cancels-the-other (OCO) is a conditional order type for pairs where executing one cancels the other.
- Traders typically use OCO orders for volatile stocks that swing over wide price ranges.
- Many trading platforms allow multiple conditional orders, canceling others once one executes.
Basics of Using a One-Cancels-the-Other Order
You can apply OCO orders to trade retracements and breakouts. If you're looking to trade a break above resistance or below support, set up an OCO with a buy stop and sell stop to enter the market. For instance, if a stock trades between $20 and $22, you could place an OCO with a buy stop just above $22 and a sell stop just below $20. When the price breaks out, the trade executes, and the opposite stop cancels.
On the flip side, for a retracement strategy buying at support and selling at resistance, use an OCO with a buy limit at $20 and a sell limit at $22. Remember, if you're using OCO to enter the market, you'll need to manually add a stop-loss order once the trade is live. Also, ensure the time in force for both parts of the OCO is the same, so the execution timeframe matches for the stop and limit orders.
Example of an OCO Order in Action
Suppose you own 1,000 shares of a volatile stock trading at $10, and you expect wide swings soon with a target of $13. To mitigate risk, you don't want to lose more than $2 per share. You could set an OCO order with a stop-loss to sell 1,000 shares at $8 and a limit order to sell at $13, whichever hits first. These could be day orders or good-'til-canceled.
If the stock reaches $13, the limit sell executes, selling your 1,000 shares, and the platform cancels the $8 stop-loss automatically. If you placed these orders separately, you might forget to cancel the stop-loss, risking an unintended short position if the stock later drops to $8.
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