One Cancels Other Order (OCO): Day Trading Terminology
What is a One Cancels Other Order?
This refers to a situation where two orders are made and if one of the orders is executed, the other is cancelled automatically. OCO is known to combine a stop order with a limit order on an automated trading platform and that is why it’s used by seasoned traders with the purpose of mitigating risks.
Also referred to as a bracket order, the OCO is an instruction issued with the goal of linking a stop loss order with a limit order. When it comes to this situation, the stop loss order acts as protection in case the trade moves in the wrong direction. The limit order on the other hand serves as a profit target.
How it works
Let’s assume Investor A owns 1,500 shares of a volatile stock with a current market price of $12. Since the investor has a goal of profiting from the shares, he or she ends up setting a target of $16 on it. This is done in order to mitigate any risks.
To ensure everything will proceed according to plan, the investor will place an OCO order. The order will consist of stop loss order with the goal of selling 1,000 shares at $10 and a limit order to sell the same shares at $16. The reason for doing this is to place a bet on the action that occurs first. One thing you need to note is that the orders can either be good-till-cancelled orders or day orders.
What will happen?
When the stock attains a price of $16, the limit order to sell the shares will be executed. This will result in the cancellation of the $10 stop loss order automatically by the trading platform. If the trading platform does not cancel the order and the price of the stock plummets to $10, the investor will be in a short position. This happens if the order is executed by mistake.
Why does it matter?
In trading, investors always seek ways to capitalize on the market and reap profits. That is why they implement different strategies in order to ensure the risks are mitigated. When it comes to OCO, investors are able to take quick action finally taking advantage of rapid market movements. What does this entail?
An investor has the ability of placing two orders which increases the probability of profits. If one of the orders does not work as intended, instead of being placed in a short position, the trading platform will cancel automatically the other order that did not execute.
How is this beneficial?
It is beneficial to investors and traders who don’t want to keep track of their investment value each single day but they have the intention of selling the stock under a particular set of conditions.
How to place an OCO order
The first step begins with the primary order. As the investor, you need to head over to your trading platform and input the order information. Once you are done, select One Cancels Other from the available options under conditional orders or advanced orders. Select preview order in order to input the other order.
On the secondary order window presented to you, you can add the conditions for the second order and click preview order. Once you are done, a summary will be presented. If you are in agreement with both orders, confirm and let the system work for you.
Experienced traders implement different strategies in order to take advantage of the market and profit. One of the strategies that is perfect for both experienced and beginners is the One Cancels Other order. How? It eliminates the need of monitoring your investment each day. Furthermore, the system will accept your conditional orders and execute as required finally mitigating risks and losses.