How to Use OCO Order in Trading

Trading platforms offer support to a wide array of orders, which traders use to enter and exit the market. While most people are conversant with simple orders, there are also advanced order types designed to respond to various market situations in the stock, forex, or cryptocurrency marketplace. Once-Cancels-Other Order is one such type that takes trading to another level.

Understanding OCO Order

Once-Cancels-Other or OCO is simply an advanced market order that allows traders to place two orders at the same time. The market order comes with instructions that stipulate that whenever one is executed, the other is automatically canceled.

OCO Order simplifies the process of trading, especially when dealing with highly volatile markets. When dealing with volatile markets, one can place two orders in the market, waiting to take advantage of whichever direction price moves. Once one of the orders is triggered at a pre-determined price point, the other is automatically canceled, therefore minimizing exposure in the market or accumulation of losses in some cases.

These types of orders are also finding great use in hedging as well as in the options market. The fact that hedging involves opening two positions to mitigate against losses many at times sees the deployment of Once-Cancels-Other Orders.

How OCO Orders Work

OCO order is mostly used to link stop-loss orders used to mitigate against losses and limit orders used to lock in profits. Consider stock ABC trading at $35 a share. Upon carrying out in-depth analysis, a trader ascertains that the stock is undervalued and likely to gain significantly going forward.

In a bid to lock in gains from the $35 a share level, the trader can open an OCO sell limit at $55 level, the maximum price level he or she expects the price to climb. In addition, the trader can deploy a trailing stop order for $10. Should the share price drop by $10, then the trade would close. As price rises and climbs to the $55 level, the sell limit order is triggered, locking in profits. The trailing stop-loss order, on the other hand, is canceled.


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