As a trader, you are always on the lookout for new means of optimizing your trading strategies and increasing your chances of success. One of the tools that could be extremely helpful is called the one-cancels-the-other order. Read ahead to find out what OCOs are and how to use them to enhance your trading experience!
What Is A One-Cancels-the-Other Order?
A one-cancels-the-other order, aka OCO order, consists of two conditional orders, where the execution of one results in the automatic cancellation of the other.
What You Need To Know About One-Cancels-the-Other Orders
Still not sure what exactly the one-cancels-the-other order definition means? The idea behind this type of order is that it enables traders to plan for two possible scenarios, where the market goes either up or down.
Here’s how it works: when you place a one-cancels-the-other order, you are essentially placing two separate orders. One is a limit order to buy a certain asset at a specific price. The second order is a stop order to sell the same asset at a different price.
Suppose you intend to buy XYZ Inc shares at $50 per share. You would initiate a limit order at $50, along with a stop order at $45 in case the price falls. This means that in the event that the price reaches $50, the limit order would execute and buy the shares. Conversely, if it drops below $45, the stop order would trigger and sell the shares.
A one-cancels-the-other order is a valuable tool for traders, but there are a few things to keep in mind when using them. Firstly, it’s important to set realistic price levels for your limit and stop orders. If they are too far apart, you may miss out on potential gains or take unnecessary losses.
Secondly, OCO orders can be subject to market volatility and unexpected price movements. Finally, remember that a one-cancels-the-other order isn’t a tool that matches every trading strategy, so you should carefully assess if it’s right for you.
