What is an OCO order?
One-cancels-the-other (OCO) order is also known as the Bracket order. It is a form of conditional order when two orders are placed simultaneously, and the other order is cancelled automatically when one order executes. A conditional order means a buy and sells order or trade with a few conditions, like stop orders and limit orders. In addition, these orders function according to pre-decided conditions, like pre-decided price and how long will it take to enforce the order (time in force).
An OCO order is an amalgamation of stop and limit orders. While trading cryptocurrency, which is extremely volatile and the price of the asset changes every second of the day, an OCO or One-cancels-the-other order is placed to prevent the trader from a potential loss by placing a stop order. On the contrary, a limit order is placed to secure some gain when an investor cannot understand the ongoing market trend.
The experienced traders and cryptocurrency veterans mostly use OCO orders to mitigate or prevent risk, earn a profit, and enter the market. Therefore, these orders are very useful during breakouts and retracements. For instance, if a trader is looking to place a trade if the price breaks below the support zone (loss-making) and above the resistance zone (Profit making), they can place a one-cancels-the-other (OCO) order.
Understanding OCO orders with examples:
For example, you just purchased 5 BNB for 0.0026837 BTC or Bitcoin. You made the trade because you believe the price is already touching the lowest support zone, and it will bounce back. In this scenario, you can use the OCO order trading strategy by placing a limit order at BTC 0.0030 and a stop limit order at 0.0024900 BTC. Suppose your assumption is correct, and the price bounces back to 0.0030 BTC now, your sell order will get executed, and the latter will be cancelled automatically.
On the contrary, if you end up being wrong and the price drops to 0.0024950, the trade will trigger your stop limit order. It will further minimize your losses in the trade.
Learn more about Shrimpy : Crypto Portfolio Management
When to place an OCO order?
There are three situations in trading cryptocurrency when a trader needs to utilize the OCO trading strategy. Mostly every trade will fall under these three conditions, so if you are a newbie entering the market, make sure you understand them thoroughly.
Mitigating risk in open positions:
Suppose you are longing for Bitcoin. This is the most common scenario which is faced by both seasoned and novice traders. Moreover, if the price drops, opposite to what the trader expected, the trader will manage the risk and will end up making a small loss. While if the market moves according to the trader’s assumptions, the trader will make huge profits.
To support this with an example for better understanding, let’s say a trader purchased Bitcoin at a price of $56,000. The trader is expecting the Bitcoin price to touch its all-time high price of $63,000. However, the previous week’s support price is $50,000. In this situation, the trader will place a sell stop order at $50,000 and a sell limit order at $63,000.
As soon as the first order executes, the second order is automatically cancelled.
Trading during Breakouts:
Many times, the market is trading within a pre-defined range, maintaining a trend, and the trader wants to join the new trend. Moreover, the trader was a novice and did not understand the direction of the market, so he placed a sell stop order below the support zone and a buy stop order above the resistance zone.
This type of strategy is inevitable when a breakout is imminent, especially due to the news reports. Mostly, short-term traders implement this strategy.
Making a decision between two different cryptocurrencies:
There are situations in the trader’s journey when they want to buy two cryptocurrencies but do not have enough funds to diversify the portfolio or invest in both assets. That is when they can place a one-cancels-the-other (OCO) order.
Let’s take an example, a trader wants to buy both Solana and Cardano, but he does not have enough funds for it. Furthermore, in this case, he places an entry order to buy Solana at a 61% retracement level equal to $143. On the other hand, he places another entry order to buy Cardano at a 61% retracement equal to $6.50.
This OCO trading strategy is most useful when dealing with leveraged products to ensure that the trader’s account is not overleveraged.
Final Verdict:
The operational perspective of the OCO order or trading is the biggest benefit. It lays a trading plan for the investor at specific entry and exit prices. Furthermore, OCO trading is automated, and thus it completely removes emotions while trading. As humans, we are greedy, and when it’s time to sell at a higher price and take the profit, we may think that the price might rise further and not sell the asset.
However, OCO orders and pre-deciding a specific profit and loss price make the trader’s situation favourable.
