What is an OCO order and how does it work?
Mastering crypto trading
Crypto trading is becoming more and more popular these days. While the crypto market presents an exciting opportunity to gain profits for traders worldwide, successful trading requires a substantial degree of knowledge and an efficient risk management strategy.
There are many crypto trading strategies that come with promises to gain profits on the crypto market, but the crypto market is known for its volatility so you have to be prepared. To use advanced order types such as the OCO order, it is important to fully understand the crypto market and how crypto trading works.
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Understanding the One-Cancels-the-Other (OCO) order
Many times in life we have to make choices; for example, imagine yourself on a vacation in a place where the weather is unpredictable. You decided to spend some money on sunglasses if it is sunny and a raincoat if it rains. Since you bought both of these things, you are fully prepared for each scenario but only one will happen.
We can apply this simple example to financial markets to understand the main purpose of the One-Cancels-the-Other order.
A One-Cancels-the-Other (OCO) order refers to a pair of conditional orders saying that if one order executes, the other shall be automatically cancelled. This conditional order typically presents a combination of a stop order with a limit order on an automated trading platform.
Within traditional financial markets, traders utilise OCO orders to mitigate risks in relation to volatile stocks that trade over a wide range of prices. In most cases, traders utilise OCO orders to mitigate risk when entering a position and secure a good exit strategy.
How do OCO orders work?
As mentioned above, the OCO order is typically used by traders, either on traditional financial markets or the crypto market, who want to enter a trade yet also mitigate losses if the market goes against them.
The trader starts by placing two distinct orders – order A is set out to execute if the price of the asset reaches a certain level, and order B is set out to execute if the asset’s price falls to a predetermined price level. Therefore, if order A is executed, the secondary order is automatically cancelled and vice versa.
If you don't know how to place a crypto trade order, why not read this article: 'How to place a trade?'.
In other words, the trader lays down two divergent scenarios for an asset they are trading. If the trader thinks that an asset will either move up or down, they can set up an OCO order with a buy limit order above the current price and a sell limit order below that price. In case of an upward rise in prices, the buy limit orders are executed and the sell limit orders are automatically cancelled.
A practical example of an OCO order in crypto trading
Let’s lay down a practical example of automatic trades by using an OCO order. Suppose a crypto trader named Peter owns some Bitcoin (BTC). Peter’s first step is to set out OCO boundaries, both upper and lower. Peter proceeds with setting a take-profit sell order above $30,000 and a stop-loss sell order below $27,000.
Secondly, Peter must specify the time frame for executing both orders. He decides to set out a time frame which is identical to both orders; in other words, the orders will remain active until one of them is triggered within the determined time frame. Let’s say that Peter chose a time frame of 6 hours due to its chosen trading strategy.
The cryptocurrency’s price breaks above the upper boundary and triggers the take-profit order which leads to Peter selling his crypto assets at a favourable price. This event leads to the corresponding stop-loss order being cancelled.
Now imagine that Susan owns 1000 units of a volatile cryptocurrency that trades at a $10 market price at the moment. Susan thinks that it might experience short-term price fluctuations and sets out a price point of $14. However, Susan doesn’t want to lose more than $2 per unit if things go bad so she sets an OCO order that consists of a stop-loss order to sell 1000 units at $8, and a simultaneous limit order to sell 1000 units at $14. Therefore, Susan placed these orders simultaneously by defining a profit target while limiting potential losses.
Types of OCO orders
Once you understand the basics of OCO orders, let’s briefly explain several types of them.
Entry order/Stop-loss OCO orders
Let’s start with the entry order/stop-loss order which refers to a combination of an entry order and a stop-loss order. A trader places an entry order at a predetermined price level and the stop-loss order below the entry price. If the market moves up, the entry order shall be executed, and if it moves down, the second order will be triggered.
Entry order/Take-profit OCO orders
Another type is the entry order/take-profit OCO order which presents a combination of an entry order and a take-profit order. In simple terms, the trader places the entry order at a certain price level and the take-profit order above the entry price. If the market conditions are good, the take-profit order will be executed.
Stop-loss/Take-profit OCO orders
This OCO order type consists of a stop-loss order and a take-profit order; the first order is placed below the current market price, and the second one is placed above it. If the market moves up, the take-profit will be executed, and if the market dynamics are not favourable, the stop-loss order shall be executed instead.
Breakout OCO orders
The breakout OCO order is often used by traders who believe an asset will break out of its trading range; they place a buy order above the resistance level, and a sell order below the support level.
Hedging OCO orders
Finally, there is a hedging OCO order typically used by traders who want to hedge their positions. They place a buy order at the current market price and a sell order at a predetermined price level. If the market moves in the trader’s favour, the sell order shall be cancelled and vice versa.
Advantages of OCO orders
One of the main upper-hands of using an OCO order is that it enables traders to manage risks efficiently as they can set two orders simultaneously. This ensures that traders are protected from losses while still able to gain profits from trades.
Additionally, it is time-saving because traders don’t have to manually monitor the trade and adjust levels – they just need to set the orders and let the market dynamics do the rest. This feature of OCO orders also removes the possibility of trading based on emotions or market sentiment reducing the risk of human error.
OCO orders can be customised to an individual’s requirements enabling them to set out divergent levels for various trades and optimise their trading strategies. Additionally, this type of order provides traders with flexibility as orders can be used at any time for any asset class or market.
Disadvantages of OCO orders
One of the main drawbacks of an OCO order is its complexity. The fact that it consists of two orders can be confusing to new traders. Additionally, using an OCO order can lead to higher costs. Since it is made of two orders, traders can be charged double the commission fees.
Another issue is linked to the notion that once an OCO order is placed, it cannot be changed. If a trader wants to modify it, they need to cancel and place a new order which can produce increased costs and missed opportunities.
When do traders use OCO orders?
Traders take advantage of OCO orders when they want to utilise optimal entry and exit points in the traditional financial market or the cryptocurrency market. For example, OCO orders can be efficiently used in day trading when rapid decision-making processes are significant.
Furthermore, OCO orders present an advanced trading strategy that aligns with risk management purposes as it provides protection against sudden changes in the market. For example, by simultaneously placing a take-profit and stop-loss order linked to an open position, each of these orders is triggered depending on whether the market is moving in the trader’s favour or against the position.
Traders use OCO orders in times of volatility driven by market news as these orders respond to sudden price fluctuations. Without the need to constantly monitor the market, traders can more easily capitalise on news-driven market opportunities.