How to Use OCO Order in Tradingby Jhorton Jennifer Marketing Consultant
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 of order that takes trading to another level.
Understanding OCO Order
Once-Cancels–Other Order 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 of order 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 order 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 order 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.
Likewise, OCO Order is often used for trading breakouts in the forex and cryptocurrency markets. For instance, if a trader is not sure on which direction price is likely to break out after a long period of consolidation, he or she could place buy stop and sell stop at resistance and support levels.
Conversely, if a stock price is trading at between $50 and $55 range, a trader could place an Once-Cancels-Other Order with a buy stop just above $55. Likewise, the trader can set up a sell stop above the $50 level. Once price breaks above the $55 level, a buy order is triggered while the sell stop order is canceled. Similarly, shroud price break lower than a sell stop order is triggered with the corresponding buy stop order canceled.
In most trading platforms such as MT4, OCO order is not integrated by default. In this case, one has to download Expert advisors in order to add the order type. Expert advisors are simply automated trading systems that place trades based on pre-determined rules and strategies on behalf of traders
Created on May 10th 2020 07:47. Viewed 311 times.