Why would I want to use a one cancels the other order?

One cancels the other orders are often used by experienced traders who want to limit their market risk when entering a position. They can be particularly useful when trading breakouts or retracements because of their risk management feature. For example, if a trader was looking to place a trade when price breaks above resistance or below support, they might use a one cancels the other order. They would do this by placing a buy stop and a sell stop, and if one triggers the other is immediately cancelled. This can also be very useful around earnings releases, when a trader is sure price will move substantially, but they aren't sure in which direction.

What is another name for a one cancels the other order?

Because the one cancels the other order is often used to trade breakouts or tight trading ranges it is also called a bracket order. That’s because it brackets the current price in anticipation of a move in one direction or the other. This can be useful for a trader who is sure price is going to move substantially in one direction or the other, but not sure when this will happen or in which direction price will move. Often earnings releases are a good time to use this type of order. They can also be used when consolidation patterns appear.

What’s the best time to use a one cancels the other order?

Traders may use a one cancels the other order when anticipating a significant move in either direction, but they are unsure which direction that will be. This often occurs with volatile stocks after earnings reports or new product releases. The one cancels the other order can also be useful during periods of consolidation in stocks when they are trading sideways in a tight range. The same rationale prevails. The trader knows that the stock will be breaking in one direction or the other, but is unsure which direction price will take.

One Cancels the Other Orders Explained

One-Cancels-the-Other Order (OCO) – One Order For Two Outcomes

Sometimes in life, you can only have one thing or the other, but you can’t have both at the same time. It can either be sunny outside or cloudy with rain. It can’t be both. Now let’s suppose you have $20. You decide to spend it on an umbrella if it rains or on sunglasses if it’s sunny. You’re prepared for both possible scenarios but only one will come to fruition. If its sunny outside, you get the sunglasses but not the umbrella and vice versa.

If we apply this analogy to financial markets, you can better understand the idea behind a one-cancels-the-other (OCO) order. With this trading order, the investor creates a plan if the asset they’re trading rises or falls in value.

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

Simply put, an OCO order is exactly what it sounds like. It is an instruction given by the trader to automatically force one market order to stop if another reaches its target first. Usually, the two order types are stop-loss and take-profit orders.

An OCO order is a pair of conditional orders. If one order comes to fruition, then its corresponding order is automatically cancelled. The dual orders (usually a stop order and a limit order) are featured on most cloud-based trading platforms. When a trade reaches either the stop or limit price and the order is executed, its partnered order is automatically cancelled.

So why would a trader use an OCO order?

Many traders use OCO orders to minimise risk when entering a position. However, the most common reason for OCO orders is because it is a good exit strategy. For example, if you have an open position on an asset that you believe is going to decline in price, you can use OCO to profit if it somehow rises while in that same order, you can also sell it if it drops down to a pre-determined level. Whichever comes first is the order that will be executed.

An example of OCO

So, if Tesla stock is trading at $100, and you think the electric vehicle manufacturer is a sinking ship, you can set your traditional stop-loss order to sell at $99 to cut your losses. But with an OCO order, you can both set it to sell at $99 and at the same time, set it to sell at $101. In the latter scenario, you would earn a profit. And although in the former scenario you would incur a loss, at least your OCO order gave you the potential of earning a profit on a bearish stock. Whichever of the two outcomes comes first is how the order will end.

Take-profit vs Stop-loss

However, even if the asset you’re trading isn’t in a bear market, many traders use OCO orders for the same purpose. That’s because you can pre-determine two different outcomes. One can be enjoying profits if the asset value rises. This is known as a ‘take-profit’ order. At the same time, the order can be used to mitigate risk if the price level falls. This is better known as a ‘stop-loss’ order.

Another scenario where a trader might use an OCO order is to buy if an asset reaches a predetermined price level in the future and also sell if that same asset reaches a predetermined price level in the future. Each of the two potential outcomes can be set in one click with an OCO order. This strategy is often used on more volatile stocks where price levels tend to fluctuate more dramatically.

The bottom line

When one order is fulfilled, the other is automatically canceled. It’s as simple as that. As previously noted, unfortunately, it can’t be both sunny and cloudy outside. But if you apply the principles of an OCO order, you can still make the best of each potential outcome.

And although smart investors hope their stock will rise in value, they put a plan in place in case it doesn’t. Usually, that plan is an OCO order. You can use OCO orders on AvaTrade’s trading platforms.

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