What is One Cancels the Other Order (OCO)?
A One Cancels the Other Order, also known as an OCO order, is a type of trading order used in financial markets to execute multiple trades simultaneously. It is a combination of two separate orders: a stop order and a limit order. The stop order is triggered when a certain price is reached, while the limit order specifies the highest or lowest price the trader is willing to buy or sell an asset at.
When an OCO order is placed, it creates two separate orders in the market. If one of the orders is executed, the other order is automatically cancelled. This allows traders to simultaneously set multiple targets for a trade, without having to constantly monitor the market.
For example, a trader might use an OCO order to buy a stock if it reaches a certain price, but also set a limit on the amount they are willing to pay. If the stock reaches the specified price, the order will execute and the trader will purchase the stock at the best available price, up to the specified limit. If the price of the stock continues to rise and the limit is not reached, the other order will cancel automatically.
OCO orders are useful for traders who want to take advantage of market movements, but also want to limit their risk. By setting both a stop order and a limit order, traders can ensure that they will not pay more for an asset than they are willing to, while also being able to take advantage of favorable market conditions.
Simplified Example
A One Cancels the Other Order (OCO) is like having two wishes at the same time, but you can only have one of them come true. Imagine you are at an ice cream shop and you want both a chocolate and a strawberry ice cream, but you can only have one. You tell the ice cream maker that you want either the chocolate or the strawberry, but not both. The ice cream maker writes down your two wishes, and as soon as one of the wishes is fulfilled (i.e., you get either the chocolate or the strawberry), the other wish is automatically canceled. In a similar way, with a One Cancels the Other Order in trading, you set two orders for a stock, but you can only have one of the orders executed. As soon as one order is filled, the other order is automatically canceled. This helps you manage risk and make sure that you don't end up with more or less stock than you wanted.
History of the Term "One Cancels the Other Order (OCO Order)"
The exact originator of the term "OCO order" (One-Cancels-the-Other order) in crypto is unclear, but it is believed to have emerged in the mid-2010s as cryptocurrency trading platforms began to offer advanced order types to traders. Before this development, traders predominantly relied on basic order types, such as market orders and limit orders, which offered limited control over order execution. OCO orders were introduced to address the need for more sophisticated order management in the volatile and dynamic cryptocurrency market. They enable traders to place two conditional orders simultaneously, with the execution of one order automatically canceling the other. This mechanism provides traders with greater control over their order execution strategy and enhances their ability to manage risk effectively.
Examples
Buy-Stop, Sell-Stop Order: A Buy-Stop order is a type of order in which a trader sets a higher price to buy a security, and a Sell-Stop order is a type of order in which a trader sets a lower price to sell a security. These two orders can be combined as a One Cancels the Other (OCO) order, in which the execution of one order cancels the other. For example, a trader may set a Buy-Stop order at $100 for a stock and a Sell-Stop order at $90, with the OCO instruction. If the stock price reaches $100, the Buy-Stop order will be executed, and the Sell-Stop order will be automatically canceled. If the stock price falls to $90, the Sell-Stop order will be executed and the Buy-Stop order will be canceled.
Take Profit, Stop Loss Order: A Take Profit order is a type of order in which a trader sets a target profit price, and a Stop Loss order is a type of order in which a trader sets a maximum loss price. These two orders can also be combined as an OCO order, in which the execution of one order cancels the other. For example, a trader may set a Take Profit order at $110 and a Stop Loss order at $90 for a stock, with the OCO instruction. If the stock price reaches $110, the Take Profit order will be executed and the Stop Loss order will be canceled. If the stock price falls to $90, the Stop Loss order will be executed and the Take Profit order will be canceled.
Entry Limit, Entry Stop Order: An Entry Limit order is a type of order in which a trader sets a maximum price to buy a security, and an Entry Stop order is a type of order in which a trader sets a minimum price to buy a security. These two orders can also be combined as an OCO order, in which the execution of one order cancels the other. For example, a trader may set an Entry Limit order at $100 and an Entry Stop order at $90 for a stock, with the OCO instruction. If the stock price reaches $100, the Entry Limit order will be executed and the Entry Stop order will be canceled. If the stock price falls to $90, the Entry Stop order will be executed and the Entry Limit order will be canceled.