Trading cryptocurrencies is associated with high risk, but it is this risk that also provides opportunities for significant profits. One way of managing this risk is using one cancels the other (OCO) orders. These orders help traders enter, and exit positions with ease, as well as lock-in realized profits. What’s more, these orders will grant you more time to analyze the markets for other opportunities, as opposed to actively monitoring each of your trades.
The OCO order explained
The OCO is an order type that enables you to make two pending conditional orders. If the conditions of one are fulfilled, and the order is completed, the second is automatically canceled. This order type is mostly used as a risk management measure or when a trader intends to bet on a market break in either direction.
Usually, the OCO utilizes two types of orders – the stop order and the limit order. The former is usually placed above or below the current market price. This way, whenever the coin’s price hits this stop level, it converts into a market order. A limit order, in contrast, is placed at a specific price that offers a better entry than the current market price.
For instance, if ETH is trading at $3,000, a stop order to purchase the coin would be placed above this current price, like at $3,100. A stop order to sell would be situated below its market price, say at $2,900. On the other hand, a limit order to sell would be placed above the market price, while one to buy would be below this price. Whichever order type you select – stop or limit, the first order to execute will automatically cancel the other. Additionally, if you cancel one of the orders before it is executed, by design, it cancels the other.
Perks of the OCO order
It helps automate trading decisions
When you identify a suitable trading opportunity in your analysis of the markets, you can utilize an OCO order to help you determine suitable entries and exits for your trade. Once these orders are made, they will automatically open and close your desired position according to your specifications and the prevailing market conditions. This way, you can concentrate on finding other opportunities without having to babysit each of your open trades or worrying that they are accumulating losses.
It helps prevent emotional trading
When entering a position in crypto, especially when the market is highly volatile, the price fluctuations may make you feel like you could get a better entry price. Similarly, when exiting a position in profit, you might be hesitant as you think you may be leaving money on the table. Both of these instances come about because of human emotions, of which all of us are victims.
By using the OCO order, you are obliged to stick to your original trading plan, thus preventing losses that more often than not emanate from inculcating emotions into your trading decisions.
Applications of the OCO order
Risk management for open positions
When you’re holding an open position on any cryptocurrency, oftentimes, you will want to take measures to prevent large losses or take any accumulated profits before the market moves against you. This can be achieved using an OCO order. For instance, let’s say you’re long on ETH. You can place an OCO order where you exit the position at the next valid resistance level, whereas the second-order exit your position at the last valid support level. This way, if the trend continues, you’ll exit with some profits secured.
If the coin crashes, you will exit your position with minimal losses incurred. Essentially, the OCO, in this case, acts as a take-profit and stop-loss order.
Trading breakouts
Sometimes, the market goes into consolidation, whereby prices adhere to a resistance and support level for a prolonged period of time. Usually, when this happens, it culminates in a spike in volatility, which manifests in a breakout in either the upward or downward direction.
In such a scenario, a trader could place an OCO order even though they are unsure of the direction of the breakout. To do this, they would place a sell-stop order below the support level and a buy-stop order above the resistance. This way, whichever direction the breakout happens, one trade will be executed while the other will be canceled.
In the illustration above, the buy stop order would have been activated, opening a long position and simultaneously canceling the sell stop order.
Such an OCO order can also be used to trade major news events and releases. For instance, the non-farm payrolls (NFP) report out of the US tends to affect the dollar significantly. This usually reverberates across most cryptocurrencies. Therefore, one could place two orders in opposite directions just before the release. This way, whichever side the market moves, one order is fulfilled and automatically cancels the other.
When torn between purchasing two cryptos
Sometimes, you may be spoilt for a choice between two cryptocurrencies but only have the capital to purchase one. You may place two pending buy orders on the two cryptos as an OCO in such a case. Whichever market satisfies your buy conditions first executes the purchase, exiting your position on the other token. This is especially helpful when dealing with leveraged products, as it can help you avoid overleveraging your account.
Conclusion
An OCO is an order type where two pending orders are placed, and whichever order executes first automatically cancels the other. This order type is beneficial in crypto markets which tend to be highly volatile. It also helps automate trade entry and exit, as you don’t have to manage each of your trades actively.
