What is a one-cancels-the-other order?
A one-cancels-the-other (OCO) order combines a pair of different trading order types, such as a limit order and a stop order, allowing simultaneous placement of stop loss and profit objectives for positions.
OCO orders are conditional orders in trading used by traders to simultaneously place two orders: a primary order and a secondary order. They operate so that if one order is fulfilled, the other is automatically canceled.
With the help of this trading strategy, traders can manage their risk and establish precise entry and exit positions. By incorporating OCO orders, traders can automate transactions, reducing the necessity for constant market monitoring. In volatile markets, they provide traders with greater control over their positions.
The implementation of crypto OCO orders varies across crypto exchange platforms. Some trading platforms with OCO capabilities allow users to choose simultaneous order types, while others may necessitate manual pairing of orders, requiring traders to create and bundle orders for OCO independently.
How does an OCO order work?
OCO orders offer a comprehensive and effective way to manage positions and the ability to automate strategies associated with risk management and profit-taking.
To better understand how OCO orders can be used, let’s walk through an example: Alice has some Bitcoin (BTC) and uses an OCO order to automate her trades.
Step 1: Alice sets OCO boundaries
When Alice set up the OCO, Bitcoin was trading in a range between $30,000 and $33,000. To place an OCO order, Alice needs to set upper and lower boundaries. Considering the defined trading range, Alice sets a take-profit sell order above $33,000 and a stop-loss sell order below $30,000.
Step 2: Alice defines the time frame for OCO orders
Alice needs to specify the time frame for executing both stop orders. In this case, she decides to use a time in force identical to both orders. This means the buy-stop and sell-stop orders will remain active until they are triggered or canceled within the specified timeframe. Alice chooses a time frame of two hours, which aligns with her trading strategy, ensuring that both orders are valid for the same duration.
Step 3: Alice executes the buy order on the breakout
As the market conditions of this example evolve, Bitcoin’s price eventually breaks above the resistance level of $33,000. The take-profit order is triggered, and Alice successfully sells Bitcoin at a favorable point. At the same time, with the execution of the sell order, the corresponding stop-loss order is automatically canceled.
With these steps, Alice has successfully used an OCO order to safeguard her investment and make money without constantly monitoring the market.
When to use OCO orders in trading?
An OCO order is an option for traders aiming to utilize optimal entry and exit points in the stock or crypto market while offering versatility across various scenarios based on the trader’s objectives.
Day trading with OCO orders
In day trading, where prompt decision-making is crucial, OCO orders can be used to set predefined exit points for their trades. By simultaneously placing a stop-loss order to limit potential losses and a take-profit order to secure gains, day traders can automate the execution of these crucial strategies, allowing them to focus on analyzing the market and identifying new opportunities.
OCO orders provide day traders with a disciplined approach to risk management and can help ensure that they adhere to their trading plans amid the fast-paced nature of day trading.
Risk management with OCO orders in open positions
For risk management purposes, OCO orders are an advanced trading strategy that helps navigate the volatile crypto market and safeguard against downward corrections. As an asset’s price rises, this dynamic approach automatically modifies the stop-loss level, offering potential protection against sudden changes while still allowing profit-taking during positive trends.
By concurrently placing a take-profit and stop-loss order connected to an open position, traders can implement OCO orders. The take-profit order locks in profits at a predefined level when the market moves in the trader’s favor. In contrast, the stop-loss order is activated to limit potential losses if the market moves against the position.
The OCO structure streamlines risk management by ensuring that once one order is executed, the other is automatically canceled, eliminating the need for constant manual intervention.
Breakout trading with OCO orders
When an asset is about to break out of a trading range, OCO orders can be helpful as they allow traders to profit from breakouts above or below support or resistance. The trading mechanism can assist after an extended period of consolidation during which the price of an asset typically breaks above resistance or falls below support.
This allows them to enter the market in the direction of the breakout without unnecessary risk. If the price breaks out in either direction, one of the orders is triggered while the other is canceled.
OCO orders for market news
In times of news-driven market volatility, traders utilize OCO orders to place buy-stop and sell-stop orders automatically and simultaneously. These orders respond to sudden price changes caused by significant news events. This strategy allows traders to capitalize on market opportunities without constant manual monitoring.
OCO orders provide a systematic and automated approach, allowing traders to safeguard positions during heightened volatility and seize favorable market conditions while canceling the other order automatically.
Advantages and disadvantages of OCO Orders
OCO orders can be useful for crypto trading and managing risk; however, they should be used cautiously after considering the advantages and drawbacks.
One of the benefits of OCO orders is that they can help traders manage their risk effectively by setting up stop-loss and take-profit levels simultaneously. Instead of manually monitoring the trade, such orders can also save traders time and effort, reduce the risk of human error and avoid behavioral trading.
Additionally, OCO orders can be tailored to an individual trader’s requirements, allowing them to set distinct take-profit and stop-loss levels for various trades. Nevertheless, OCO orders can present challenges to some traders. Compared with traditional orders, OCO orders might be more complicated for traders to use effectively, requiring additional training and experience.
Notably, the exchange platforms may also charge higher fees for OCO orders. Furthermore, partial fills in OCO orders occur when only part of the order is executed, with the remainder canceled. While OCO orders manage risk and secure profits, rapid market changes or limited liquidity can hinder execution speed, potentially resulting in missed opportunities or larger-than-anticipated losses.