Understanding How One Cancels The Other (OCO) Orders Work
Just as with any other investment, Forex trading too has several effective risk management strategies. Two of the simplest of risk management strategies include the ‘stop-loss’ order that helps you contain your losses and the second is the ‘limit order’ that helps you lock in the profit that you have earned. Though equally easy to use, One Cancels the Other (OCO) Orders are a bit more sophisticated and more effective at maximizing returns and controlling risks.
Explaining Stop-Loss, Limit-Order & One Cancels The Other (OCO) Orders
Take for example the USD/CHF currency pair that is being traded at 1.4625, which means the dollar can be sold for 1.4625 Swiss Francs. One of the distinctive traits of Forex trading is that exchange rates change rapidly and that too, by large amounts. If the dollar happened to be on the downslide and fell to about 1.4600 within a specific time- it could be one hour or one day- the investor may want to consider issuing a stop loss order at 1.4575. This stop loss order converts into market orders, which are then subject to realization when it has reached the stop price.
Trying to determine your stop price can be tricky. While you may hesitate to pull out in the event of a 5% price drop in the hope that it would recover, you may very well wish you had gotten out at a 10% if the price goes down to another 20%.
On the flip side, you’d be over the moon if your luck turned and the price went up to 1.4900. It’s all in the timing and therein lies the catch; it is almost impossible to predict which way the market is headed.
You may wish you could put in an order for selling when the market price reached its peak but it’s difficult to determine where the peak is. There’s no way of knowing whether a drop back in the market is just a momentary downward fluctuation or the onset of a precipitous drop. To be on the safe side you can request a limit order and lock in at least some of the profit.
One Cancels the Other (OCO) Orders offer the investor a middle path wherein he can request the broker to make a decision based not only on one condition but on a pair of possible conditions. If, for example, the investor had simultaneously placed a limit order at 1.4725 and a stop order at 1.4575, upon the realization of any one of the conditions, the second part of the order automatically stood canceled.
Practical Implementation of One Cancels The Other (OCO) Orders
One Cancels the Other (OCO) Orders can be placed by investors to purchase Swiss Francs at 1.4700 or euros at 1.1905. The different ‘mix and match’ combinations that are available will invariably differ from one broker to the next as well as the kind of account you hold and the relationship you have with your broker.
While it is always advisable to have a diverse spectrum of investing strategies, implementing One Cancels the Other (OCO) Orders is by far one of the simpler and more effective of all Forex trading techniques.