There are a class of orders in the financial markets and in the foreign exchange market that are known as conditional orders. We will go into more details about them, but one of the most important orders in that category is the one that cancels that other order or the OCO.
A one cancels the other order is a directive issued by the trader to the broker, according to which a buy or sell order is issued that should be canceled if another order is filled or carried out by the broker.
One cancels the other order can be regarded as a precautionary move and step by seasoned traders. Although it might be a bit difficult to execute this order in the best way possible.
Read along to find out everything about the OCO order and how to implement it with a clear and precise example.
What Are Conditional Orders in the Forex Market?
It was mentioned in the introduction that one cancels the other order is among the orders that are known as conditional orders. But what exactly are conditional orders?
Before we discuss the OCO order itself, let us see what conditional orders are and how they function, because it is necessary to understand this first and then the specific orders.
Simply put, conditional orders are orders that carry with them a stipulation. It means they have a condition along with them. Now this condition can be in the form of many different things.
Because they have an added and extra bit of stipulation along with the main order itself, conditional orders are a bit more difficult to control and execute properly. For this reason, such orders are mostly used by traders who have a higher degree of earpiece and knowledge regarding the financial market in question, be it the stock market or the forex market.
There are different types of conditional orders. For example, there is the ever famous limit order and also what we are discussing here right now, one cancels the other order. So, now let’s discuss the OCO order.
What Is the One Cancels the Other Order?
So one cancels the other is among the category of orders known as conditional orders. This means there is a condition tied into the fabric of this order when it is issued by the trader to the broker.
According to this order, the execution of one order will automatically mean the cancellation of the other order. Therefore, one cancels the other order is in fact made of two distinct orders or a pair of orders. And in such a time when one order is executed, the other one is canceled.
One such special situation and condition where financial market traders such as forex traders can use the one cancels the other order is during price breakouts and retracements.
In essence the one cancels the other order is like many other financial market orders that are made by combining a number of other orders with each other, or at least part of their essence.
As such, the one cancels the other order is the result of combining two other famous and quite widely used orders. One of them is the stop order and the other is the limit order.
Let’s take a look at both of these orders in order to have a better understanding of the one cancels the other order.
OCO: Infused with the Essence of Stop Order and Limit Order
Starting with the stop order, it is an order that stops and executes the trade when the price in the market reaches a certain threshold. Of course the trajectory of the price and the stoppage of the order in order to be filled will ultimately depend upon the trajectory of the market and the type of order placed.
For instance, a stop order to sell will execute the order before prices have fallen too much in order to prevent losses that are not necessary. And a stop order to buy will stop the order to execute it after it has gone beyond the currency market prices in order to maximize the profits.
On the other hand, a limit order is another directive in order to buy or sell that is characterized by the condition that the order ought to be executed at the requested price or at a better price.
A limit order too will depend upon the type of order. So when it is a buy order that will be filled at the requested price or even lower. And a sell order will be filled at the requested price or even higher.
An Example of One Cancels the Other Order
Now that we have a general understanding of the OCO order, let’s see what it really is through an actual example.
Suppose you own 100 Tesla shares that you want to sell. Further suppose that the currency price of Tesla stands at $290 per share. So in this situation in order to protect your shares, you can place a one cancels the other order in the form of a once stop loss order and one limit order.
Now, in this case the stop loss order could be to sell your shares at $288 to have a safe space in order to prevent further losses. At the same time, your limit order can be to sell your Tesla shares at $292.
And at this point, it all depends where the market will turn to. If things turn out well and prices increase a bit to hit the limit order, then the stop loss order is automatically canceled. On the other hand, if the market does not perform well and prices fall, then your stop loss order is executed to prevent losses and your limit order is canceled by the broker.
The Opposite Side of One Cancels the Other Order
Standing on the exact opposite side of the OCO order we have what is known as an order sends another order OSO which is otherwise known as the one triggers the other order OTO.
Of course, such orders work in a way that when a part of the order is executed the other part is executed as well. So instead of canceling each other, they trigger each other.
A one cancels the other order is an order with which you are able to issue a pair of orders, which are almost always a stop loss order and a limit order. And the way it works is that depending on the price movements, when one order is hit and executed, the other order is canceled automatically by the broker. an OCO order can be used as a great method of protecting your assets in the market, but it is a complex order to issue properly and requires enough knowledge and experience.