What Is a One-Cancels-the-Other (OCO) Order?

A one-cancels-the-other (OCO) order is a type of conditional order in trading that allows an investor to place two orders simultaneously, with one order being canceled when the other is executed.

How OCO Orders Work

The OCO order is often used by traders who are looking to enter a trade but want to limit their losses if the trade goes against them. Here’s how it works:

1. The trader places two separate orders: Order A and Order B.
2. Order A is set to execute if the price of the security reaches a certain level.
3. Order B is set to execute if the price of the security falls to a certain level.
4. If Order A is executed, then Order B is automatically canceled.
5. If Order B is executed, then Order A is automatically canceled.

This means that the trader can set up two different scenarios for the security they are trading. For example, if a trader thinks that a stock will either break out to the upside or break down to the downside, they could set up an OCO order with a buy limit order above the current price and a sell limit order below the current price.

If the stock price breaks out to the upside, the buy limit order will execute, and the sell limit order will be automatically canceled. Conversely, if the stock price breaks down to the downside, the sell limit order will execute, and the buy limit order will be automatically canceled.

OCO orders can be used in combination with other types of orders to create more complex trading strategies.

Types of OCO Orders

There are several types of one-cancels-the-other orders that traders can use to manage risk and execute their trades. Here are some of the most common types of OCO orders:

1. Stop-loss/take-profit OCO order: This type of OCO order combines a stop-loss order and a take-profit order. The stop-loss order is placed below the current market price, and the take-profit order is placed above the market price. If the market moves in the trader’s favor, the take-profit order will be executed, and if the market moves against the trader, the stop-loss order will be executed.
2. Entry order/stop-loss OCO order: This type of OCO order combines an entry order and a stop-loss order. The entry order is placed at a predetermined price level, and the stop-loss order is placed below the entry price. If the market moves in the trader’s favor, the entry order will be executed, and if the market moves against the trader, the stop-loss order will be executed.
3. Entry order/take-profit OCO order: This type of OCO order combines an entry order and a take-profit order. The entry order is placed at a predetermined price level, and the take-profit order is placed above the entry price. If the market moves in the trader’s favor, the take-profit order will be executed, and if the market moves against the trader, the entry order will be canceled.
4. Breakout OCO order: This type of OCO order is used by traders who believe that a security will break out of a trading range. The buy order is placed above the resistance level, and the sell order is placed below the support level. If the market breaks out to the upside, the buy order will be executed, and if the market breaks out to the downside, the sell order will be executed.
5. Hedging OCO order: This type of OCO order is used by traders who want to hedge their positions. The buy order is placed at the current market price, and the sell order is placed at a predetermined price level. If the market moves in the trader’s favor, the sell order will be canceled, and if the market moves against the trader, the buy order will be canceled.

These are just a few examples of the different types of OCO orders that traders can use. The choice of which type of OCO order to use will depend on the trader’s individual trading strategy and risk management needs.

Pros and Cons of OCO Orders

One-cancels-the-other (OCO) orders can be useful for managing risk and executing trading strategies, but they also have some drawbacks. Here are some pros and cons of OCO orders:

Pros:

1. Risk management: OCO orders can help traders manage their risk by setting up stop-loss and take-profit levels simultaneously.
2. Automated execution: OCO orders are executed automatically when certain conditions are met, which can save traders time and reduce the risk of human error.
3. Flexibility: OCO orders can be customized to fit a trader’s specific needs, such as setting different stop-loss and take-profit levels for different trades.
4. Reduced emotional decision-making: Since OCO orders are executed automatically, they can help traders avoid making emotional decisions based on market fluctuations.

Cons:

1. Partial fills: OCO orders may result in partial fills, which means that only part of the order is executed while the other part is cancelled. This can happen if the market conditions change rapidly, making it difficult to execute the entire order at once.
2. Complexity: OCO orders can be more complex than traditional orders, which may require more knowledge and expertise to use effectively.
3. Limited control: OCO orders give traders less control over their trades than manually executing trades in real-time, which may not be suitable for all traders.

Overall, OCO orders can be a useful tool for managing risk and executing trading strategies, but they should be used with caution and careful consideration of their potential risks and benefits.

One-Cancels-the-Other Orders vs. Other Types of Orders

There are several types of orders that traders can use to execute their trades, and each has its own advantages and disadvantages.

An OCO order differs from a market order or a limit order in that it allows the trader to set two orders at the same time. A market order is an order to buy or sell a security at the best available price, which means the order will be filled as soon as possible. A limit order is an order to buy or sell a security at a specific price or better. An OCO order allows the trader to set a limit order and a stop order at the same time, which helps to protect against potential losses in case one order is executed

The Bottom Line

Overall, an OCO order is a useful tool for traders who want to limit their potential losses without having to constantly monitor the market. By setting two orders at the same time in the form of an OCO order, the trader can rest assured that one of the orders will be filled if the market moves against them, while the other order will be canceled.