Using One Cancels the Other Order (OCO) To Trade Volatile Markets |
Posted: June 9, 2020 |
One Cancels the Other Order (OCO) is a market order that allows traders, engaged in automated trading, to place two orders simultaneously. The conditional order stipulates that once one order is executed or filled, the other order is automatically closed. Such types of orders come in two forms, stop order and a limit order. Conversely, whenever a stop order gets filled, then the limit order gets canceled and vice versa. The conditional orders are often used to mitigate against risks in the market. Likewise, they are commonly used in trading retracements and breakouts in the capital markets. Therefore, the conditional order gives traders the benefit of placing two limit orders simultaneously. However, only one order gets filed, allowing a trader to have one position in the market. Commonly used in automated trading, the order eliminates emotions as it promotes systematic trading when it comes to triggering entry points. One Cancels Order Example Consider stock XYZ trading in a range of between $30 and $35. A trader looking to profit from a breakout either on the upside or downside could do so by placing an OCO order. In this case, he could place a buy stop that would execute as soon as price breaks above the $35 level, to profit on price rallying higher. Similarly, the conditional order would also trigger a stop limit as soon as price breaks below the $30 level allowing the trader to profit on price edging lower. An OCO order being a conditional order would trigger a buy position as soon as price breaks through the $35 resistance level. In return, the stop-limit order at the lower end of the range will be closed down. Similarly, when price breaks lower and the sell stop order gets filled, the buy stop order gets canceled automatically, allowing the trader to profit on price edging lower. In addition, one can use the conditional order to profit from retracements. In this case, the order would trigger a buy position at the $30 level, which appears to be a support level while canceling out a sell limit at $35 level, which appears to be a resistance level. Likewise, the order could trigger a sell order at the $35 level, which happens to be resistance conversely canceling buy stop at support. Uses of One Cancels Order One Cancels the Other Order finds excellent use as a risk management tools. They are often used when markets are experiencing sharp price movements. The conditional orders automate the entry process; by triggering one position and closing down another pending order. The conditional order also finds great use in managing risks in open positions. For starters, it allows traders to place a pair of interconnected stop loss and profit target orders. However, only one of the orders gets executed, allowing a trader to maximize profits and clamp down on losses. Similarly, the orders find excellent use in trading volatile securities trading in a wide range. One Cancels the other order are finding great use in the cryptocurrency space synonymous with extreme levels of volatility and price swings. TrailingCrypto, one of the best crypto trading bots, accords traders access to the conditional order, in addition to other advanced orders. Bottom Line An OCO order is a market order that combines two entry orders. The order stipulates that when one order is filed then, the other one gets canceled automatically. Therefore the order is commonly used in risk management by ensuring traders avoid negative exposures to the markets.
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