What Is an OCO Order (One-Cancels-the-Other)?
Crypto Basics

What Is an OCO Order (One-Cancels-the-Other)?

Created 7mo ago, last updated 7mo ago

OCO (one-cancels-the-other) orders help traders protect their profits while limiting losses.

What Is an OCO Order (One-Cancels-the-Other)?

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The crypto market is known for its wild price swings and how it offers more profit-generating opportunities. Although volatility unlocks mouthwatering opportunities, it also breeds risks. Therefore, traders tend to incorporate several trading techniques that curtail losses while optimizing profitability.

One such strategy involves the use of one-cancels-the-other (OCO) orders. In this article, we will discuss what OCO order is, why is it a popular trading strategy, and how to use it.

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What Is an OCO Order?

An OCO order is a way to place two different types of orders, such as a stop order and a limit order, at the same time. These orders are paired together so that when one order is executed, the other order is automatically canceled. This allows traders to manage their risks and set specific entry and exit points for their trades.

It's important to note that the paired orders cannot be executed at the same time, as the execution of one order triggers the cancellation of the other — as the name suggests. By using OCO orders, traders can automate their trades and reduce the need for constant monitoring of the market.

Suppose an investor owns a stock that is currently trading at $50 per share. They are willing to sell it if the price falls below $45 to limit their losses, and are also willing to take profits if the price goes up to $55. To execute these two trades, the investor can use an OCO order with a limit order to sell the stock if the price goes up to $55 and a stop order to sell the stock if the price falls below $45.

Here, the OCO order has two components, the first one is a limit order, which is to sell the stock if the price goes up to $55. The second component is a stop order, which is to sell the stock if the price falls below $45. When either of these conditions is met, the other order will automatically be canceled, which means that only one of the two orders will be executed.

Source: Tradestation.com

For instance, if the stock price goes up to $55, the limit order will execute, and the stop order will automatically be canceled. On the other hand, if the price falls below $45, the stop order will execute, and the limit order will automatically be canceled.

In this way, the OCO order ensures that the investor can both limit their losses and take profits without needing to monitor the market continuously.

It is worth mentioning that OCO order is not peculiar to the crypto market as it is used in other financial markets too, including stocks. However, it has become a popular trading strategy for crypto traders due to the volatile nature of crypto assets.

Why Do Traders Use OCO Orders?

From our definition, it is clear that OCO orders are suitable for traders that fall into the following categories:

  • Traders looking to limit their exposure to risks: The possibility of simultaneously setting stop-loss and take-profit orders keep the potential risks at a bare minimum without diminishing the profitability of the trade.
  • Traders looking to manage their emotions when trading: Experienced traders understand that it is crucial to keep emotions in check during trading. This is particularly true when deciding the best entry and exit point of a highly volatile market. Fortunately, the OCO order technique helps traders set a predefined goal, thereby reducing the occurrence of emotion-based errors.
  • Traders looking to enjoy an operational advantage: Since OCO allows traders to automate the execution and cancellation of orders, they do not need to track price movements consistently or execute trades manually. Considering that OCO enables the implementation of profit optimization and risk management strategies, traders have spare time to analyze other markets or perform other activities.

To better explain an OCO order, let us discuss the peculiarities of stop and limit orders.

What Is a Stop Order?

A stop order allows traders to execute trades if the market moves against their intended targets. For example, if a trader has set a stop order somewhere below the market price and the market suddenly goes down, the stop order will automatically be executed to limit the loss. This type of stop order is called a stop-loss order.

Conversely, traders use stop-entry orders to initiate buy orders at a preset value above the current market price. This is suitable in periods when the asset is experiencing an uptrend.

To clarify, stop orders are used as a risk management tool by traders to limit their losses or lock in profits. When a stop order is triggered, it becomes a market order to buy or sell the asset at the best available price, which means the trader may not get the exact preset value they were hoping for.

Traders may prefer stop orders to be filled to avoid larger losses, but they do not necessarily prefer them to be filled over hitting a target price. Both stop and target orders serve different purposes and are used in different trading strategies.

What Is a Limit Order?

A limit order allows traders to set predefined prices at which to sell or buy an asset. For instance, a trader looking to buy Bitcoin at a specific price below the current market price will set a buy limit order such that the trade automatically executes as soon as BTC reaches the predefined price limit (or lower). The same principle also allows traders to sell an asset at a value above the current market price. In this case, the trader initiates a sell limit order

How to Use OCO Orders?

Now that you understand the fundamentals of a stop order and a limit order, below is how you can pair the two order types to implement an effective OCO order.

As mentioned earlier, an OCO order helps manage risks. It is also an ideal option for traders looking to determine the best entry and exit points. Depending on the goals of a trader, there are three scenarios where an OCO order can be used.

Risk Management in Open Positions

Traders commonly set OCO orders when they have an open position. In such scenarios, traders look to limit the risk bearing in mind that the market can move against them. Also, the OCO order ensures that traders do not lose out on profit-earning opportunities when the market moves in their favor.

For instance, a trader buys Bitcoin at $19,000 with the hopes that the price may rise to $23,000 in the coming weeks. Knowing how volatile crypto assets can be, the trader can set an OCO order that pairs a stop-loss order and a sell limit order. This setup reduces risks while ensuring that the possibility of earning profits does not diminish.

The trader in our example can set a stop-loss order if a correction pushes the price of BTC below $17,000. This order type can be paired with a sell limit order that takes profit when the price of Bitcoin hits (or goes over) the $23,000 price mark. With this, the trader has successfully taken advantage of an OCO order to increase returns while reducing the risk exposure.

Targeting Price Breakouts

OCO orders are also effective when the price of an asset seems to trade within a defined range and is poised for a breakout. This scenario is ideal after a prolonged period of consolidation wherein the price of an asset tends to surge above the resistance level or plunge below the support.

The appropriate OCO order for this market condition pairs a sell stop-loss order below the support and a stop-entry order above the resistance.

For example, if the price of Bitcoin is swinging between $18,500 and $20,000, a trader can initiate an OCO order to execute a sell limit order when BTC’s price breaks beyond $20,000. If the reverse is the case (that is, the price of BTC falls below support), the OCO order will execute a sell stop order, preferably to minimize the loss.

Deciding to Buy Between Two Cryptocurrencies

OCO order is also effective when deciding where to invest your limited funds, especially when you are caught between two choices. Note that OCO order is not an asset distribution strategy. Hence, you can only invest your fund in one of the two assets under consideration. Also, the OCO order helps traders base their investment decision on favorable pricing conditions. In other words, you can set up your OCO order that initiates a buy order when either of your preferred assets reaches your preferred price target.

Let's explore an example where a trader is interested in buying Bitcoin and Ethereum but does not have enough capital to invest in the two assets at once. In this scenario, the trade can wrap two different buy orders in an OCO that would initiate at specific prices.

The trader, named Joe, can set an entry order for Bitcoin at $20,000 and another one for Ethereum at $1,000. These prices signify the amount at which Joe intends to buy these assets. Since this is an OCO order strategy, only one of these orders will execute. If Bitcoin is the first to fulfill the price condition, then the Bitcoin entry order will execute while the Ethereum entry will cancel. The reverse occurs in the case when the price of Ethereum falls to $1,000 before Bitcoin's value hits the $20,000 price mark.

How To Execute an OCO Order?

Having understood the use cases of OCO orders, it is time to learn how to execute one. Note that there is no standard procedure for implementing OCOs, as the process depends on the exchange platform you are using. Some exchanges offer a seamless user interface that provides easy-to-understand ways to set up OCOs. Such platforms allow users to select the number of order types they want to run simultaneously.

Conversely, other exchanges entail users to pair orders manually. Exchanges that fall under this category may require traders to create orders independently and bundle them together to create an OCO.

Bearing this in mind, it is imperative for traders to opt for an exchange platform that caters to users with their current level of trading experience.

Final Thoughts

OCO orders is a tool that could help traders optimize their profitability. This is especially true for traders looking to trade highly volatile asset classes like cryptocurrencies. This strategy favors an automated approach to risk management and profitability optimization.

The core advantage of utilizing OCO orders stems from the possibility of pairing opposing orders so that there is little chance of taking a heavy loss if the market moves against the trade. In addition, an OCO order tends to make trades easier as it allows traders to stick to predesigned trading strategies.

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