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

How OCO Orders Work

An One-Cancels-the-Other (OCO) order is an effective tool for traders who wish to establish a position while maintaining a cap on potential losses in the event the market moves unfavorably. The mechanism of an OCO order operates as follows:

The trader initiates two distinct orders: Order A and Order B. Order A is an instruction to buy or sell the security at a specified threshold if the price ascends to a certain level. Concurrently, Order B is an order to execute at an alternate set price if the security's price descends to a designated level.

The execution of either Order A or Order B prompts the immediate cancellation of the remaining order. That is, if Order A is filled, then Order B is instantly nullified, and vice versa.

Hence, a trader is able to structure two potential outcomes for the security in question. For example, envisioning that a stock might either surge or plunge, a trader may configure an OCO order with a buy limit order above the market's current price, alongside a sell limit order beneath it.

If the stock's price rallies, the buy limit order activates, resulting in the automatic cancellation of the sell limit order. Should the stock's price decline, the sell limit order will execute, and the buy limit order will be canceled in return.

Furthermore, OCO orders afford the flexibility to be combined with other order types for the execution of advanced and intricate trading strategies.

Types of OCO Orders

Traders have several types of one-cancels-the-other (OCO) orders available to manage risk and execute trades. Some common types include:

1. Stop-loss/take-profit OCO order: This combines a stop-loss order and a take-profit order. The stop-loss order is placed below the current market price, while the take-profit order is placed above it. If the market moves favorably, the take-profit order is executed; if it moves against the trader, the stop-loss order is executed.

2. Entry order/stop-loss OCO order: This combines an entry order and a stop-loss order. The entry order is placed at a predetermined price level, while the stop-loss order is placed below it. If the market moves as desired, the entry order is executed; if it moves against the trader, the stop-loss order is executed.

3. Entry order/take-profit OCO order: This 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 it. If the market moves favorably, the take-profit order is executed; if it moves against the trader, the entry order is canceled.

4. Breakout OCO order: This is used when traders anticipate a security will break out of a trading range. A buy order is placed above resistance, while a sell order is placed below support. If the market breaks out upward, the buy order is executed; if it breaks out downward, the sell order is executed.

5. Hedging OCO order: Traders use this order to hedge their positions. A buy order is placed at the current market price, while a sell order is placed at a predetermined price level. If the market moves favorably, the sell order is canceled; if it moves against the trader, the buy order is canceled.

These examples demonstrate the various types of OCO orders available to traders. The choice of which type to use depends on individual trading strategies and risk management requirements.

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

The trading landscape offers a variety of order types, each tailored with its distinct set of benefits and drawbacks for executing trades.

Diverging from market orders or limit orders, the One-Cancels-the-Other (OCO) order provides traders the option to simultaneously set two separate trading directives. A market order is a request to transact a security promptly at the optimal prevailing market price, guaranteeing rapid execution. In contrast, a limit order is an instruction to execute a trade at a specific set price, or a more favorable one, without the guarantee of execution.

An OCO order uniquely empowers the trader to place a limit order in conjunction with a stop order. By executing such a dual-pronged strategy, traders can safeguard their positions from incurring potential losses should one of the orders be fulfilled.

The Bottom Line

In summary, OCO orders are valuable for traders seeking to cap possible losses without continuously monitoring the market. By placing two orders simultaneously using an OCO order, traders can ensure that one order will be executed if the market moves unfavorably, while the other order will be canceled. This allows for a more streamlined and automated risk management approach.