An OCO order stands for a one-cancels-the-other order, which functions as a pair of conditional orders. Once one order is executed, the other order is automatically canceled as part of this condition.
Often, a trader may use an OCO order to execute a take-profit limit order along with a stop order to more easily manage trades with a predefined stop loss and profit level.
In this combination, if either the stop or limit price is reached and the order is executed, the other order is automatically canceled. Traders generally execute OCO orders for volatile stocks that are traded over a wide price range.
How Do You Use an OCO Order?
An OCO order often combines a stop order with a limit order. To use an OCO order, both the stop order and the limit order are specified upon inputting the order into the trading platform.
Traders can use OCO orders, for example, to trade a breakout above a resistance or a breakdown below a support level by using a buy stop (or sell stop) order to enter the market, and a stop order to exit the market if the trade fails.
For example, if Bitcoin (BTC) is currently trading at $50k and the trader has a long thesis that BTC will soon go to $60k if it can break above $51k. But the thesis fails if BTC dips to $48k, then they can use an OCO order to set a buy-limit order at $51k that gets filled only if the BTC price goes to $51k – to allow the trader to enter the market according to plan – and a stop order at $48k that takes the trader out of the market if price touches $48k.
What Are the Advantages and Disadvantages?
The main advantage of an OCO order is giving a trader the ability to more easily manage their portfolio without having to actively trade or watch the market.
The trader can set a plan in place and using an OCO order may even make it easier for some to be able to stick to their strategy.
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