One Cancels the Other Orders
One-Cancels-the-Other Order (OCO) – One Order For Two Outcomes
Sometimes in life, you can only have one thing or the other, but you can’t have both at the same time. It can either be sunny outside or cloudy with rain. It can’t be both. Now let’s suppose you have $20. You decide to spend it on an umbrella if it rains or on sunglasses if it’s sunny. You’re prepared for both possible scenarios but only one will come to fruition. If its sunny outside, you get the sunglasses but not the umbrella and vice versa.
If we apply this analogy to financial markets, you can better understand the idea behind a one-cancels-the-other (OCO) order. With this trading order, the investor creates a plan if the asset they’re trading rises or falls in value.
What is a One-Cancels-the-Other Order (OCO)?
Simply put, an OCO order is exactly what it sounds like. It is an instruction given by the trader to automatically force one market order to stop if another reaches its target first. Usually, the two order types are stop-loss and take-profit orders.
An OCO order is a pair of conditional orders. If one order comes to fruition, then its corresponding order is automatically cancelled. The dual orders (usually a stop order and a limit order) are featured on most cloud-based trading platforms. When a trade reaches either the stop or limit price and the order is executed, its partnered order is automatically cancelled.
So why would a trader use an OCO order?
Many traders use OCO orders to minimise risk when entering a position. However, the most common reason for OCO orders is because it is a good exit strategy. For example, if you have an open position on an asset that you believe is going to decline in price, you can use OCO to profit if it somehow rises while in that same order, you can also sell it if it drops down to a pre-determined level. Whichever comes first is the order that will be executed.
An example of OCO
So, if Tesla stock is trading at $100, and you think the electric vehicle manufacturer is a sinking ship, you can set your traditional stop-loss order to sell at $99 to cut your losses. But with an OCO order, you can both set it to sell at $99 and at the same time, set it to sell at $101. In the latter scenario, you would earn a profit. And although in the former scenario you would incur a loss, at least your OCO order gave you the potential of earning a profit on a bearish stock. Whichever of the two outcomes comes first is how the order will end.
Take-profit vs Stop-loss
However, even if the asset you’re trading isn’t in a bear market, many traders use OCO orders for the same purpose. That’s because you can pre-determine two different outcomes. One can be enjoying profits if the asset value rises. This is known as a ‘take-profit’ order. At the same time, the order can be used to mitigate risk if the price level falls. This is better known as a ‘stop-loss’ order.
Another scenario where a trader might use an OCO order is to buy if an asset reaches a predetermined price level in the future and also sell if that same asset reaches a predetermined price level in the future. Each of the two potential outcomes can be set in one click with an OCO order. This strategy is often used on more volatile stocks where price levels tend to fluctuate more dramatically.
The bottom line
When one order is fulfilled, the other is automatically canceled. It’s as simple as that. As previously noted, unfortunately, it can’t be both sunny and cloudy outside. But if you apply the principles of an OCO order, you can still make the best of each potential outcome.
And although smart investors hope their stock will rise in value, they put a plan in place in case it doesn’t. Usually, that plan is an OCO order. You can use OCO orders on AvaTrade’s trading platforms.
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