OCO Orders: How They Can Limit Your Crypto Trading Risk

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The crypto market is attractive to new and experienced traders because of its strong trends, which also bring increased volatility and risk. One way experienced traders manage this increased risk is by incorporating one-cancels-the-other (OCO) orders into their strategies. OCO orders help traders lock in profits, manage risk, and easily enter and exit positions. This allows traders more time to analyze the market with less time spent babysitting each trade. Curious about how to include OCO orders in your arsenal of risk management tools? In this article, we’ll discuss what is an OCO order, common ways to use it and how to place an OCO order.

What Is an OCO Order? 

An OCO order is actually a pair of conditional orders. It specifies that if one order fills, then the other order is automatically canceled. The OCO order is commonly used to manage risk in an open trade, or to straddle the current market price in entering a new position.

Usually, the OCO order is a group of two traditional orders that you may be familiar with, the stop order and limit order. 

The stop order is placed at a specific price below the current market, such that if the price is triggered, the order converts to a market order. On the other hand, the limit order, which is also placed at a specific price, has a price location better than the current market price. 

For example, if Bitcoin is trading at $50,000, a stop order to buy would be placed at a price above the current market price. A stop order to sell would be placed below the market price.

Additionally, a limit order to sell is placed above the current market price, while a limit order to buy is placed below the market price.

The grouping of these orders is conditional because they cannot execute at the same time. One of the orders will cancel when the other order executes. Think of the pair of orders as being on a first come, first served basis. The order which executes first stays, while the remaining order is canceled.

How Experienced Traders Use OCO Orders

More experienced traders that know what is an OCO order tend to rely on it for a variety of reasons. For example:

  • OCO orders make it easier to manage risk.
  • OCO orders help you to manage your emotions when trading.

The Operational Advantage of OCOs

The biggest reason to use OCOs is from an operational perspective: they put a trading plan in place that calls for certain prices in order to enter and exit the market. The OCO orders are placed at those specific levels, and the trader doesn’t have to be present in front of their charts to execute the positions. This frees the trader to analyze other markets for potential trading opportunities.

OCOs Help Manage Your Trading Emotions

The second-biggest reason traders love to use OCO orders is because they remove emotions from trading. Many times, entering or exiting a position can be an emotional roller coaster.

As you’re entering into a trade, you might second-guess whether you’re entering at a good price. Then, when you decide to exit the position for profit, you might feel like there’s more gain available, fearing that you’re leaving money on the table. Or, if you exit the position for a loss, you might feel like the market may turn around and move back to break even — or better.

These emotions are magnified when volatility is high, which is frequently the case in the crypto market. However, when a trader utilizes OCO orders, the emotion of the moment is removed and the trader has more energy to focus on the actual price action. Thus, trading with OCO orders helps you stick to your original trading plan, regardless of the ongoing volatility.

When to Use OCO Orders

There are three general scenarios when a trader will want to utilize OCO orders. Nearly all trades will fall into one of these three circumstances, so traders need to have a thorough understanding of OCO orders.

Managing Risk in Open Positions

The most common situation for which traders implement an OCO order is when they’re managing risk on a currently open position. Let’s say that a trader is currently longing Bitcoin. This trader wants to manage risk so that if the market moves against them, they’ll exit the trade with only a small loss. On the other hand, if the market moves strongly in their favor, then they’ll exit the trade with a profit.

The trader has entered the market near $57,000 and, according to their analysis, a correction back below the previous week’s low at $51,000 would negate the momentum behind the current uptrend.

On the other hand, the all-time high for Bitcoin is resting near $64,000, and the trader believes BTC may find resistance and trade lower if it approaches the previous all-time high. As a result, the trader will place a sell stop order at $51,000 and a sell limit order at $64,000.

The moment one of the orders is executed, the other order needs to be immediately canceled. Therefore, the trader bundles these orders together as an OCO order. In this scenario, the trader has essentially straddled the market with a stop-loss order and a take-profit order.

Trading When Breakouts Occur

Another common scenario for implementing OCO orders is when the market is trading within a defined range, and the trader wants to join the next trend. However, the trader is unsure of the direction of the next trend, so they place a sell stop order below support and a buy stop order above resistance.

This type of strategy is useful for prolonged periods of consolidation when a breakout is imminent. Additionally, shorter-term traders will implement this strategy around major news events.

For example, the non-farm payroll jobs report is oftentimes a market-moving event. Going into the news release, traders are uncertain how the market might respond. Therefore, traders will wait about 15 minutes after the release, then mark the high and low price points to establish a straddle to enter the position.

On October 8 in the illustration below, the non-farm payroll report is released, creating a few minutes of volatility.

A trader will then identify the high price of the release, in this case near $55,177. A buy stop order is placed so that if this price is reached, the order converts to a market order to buy.

The trader will then identify the low price of the release, in this case near $54,547. A sell stop order is placed at $54,547 such that if the market reaches this price, the order converts to a market order to sell short.

Shortly thereafter, Bitcoin breaks below the support, triggering the short entry.

These two orders are then bundled together so that when one of the orders executes, the other order is immediately canceled.

Deciding Between Buying Two Different Cryptocurrencies

There are times when the trader is interested in buying two different cryptocurrencies, but has limited funds to invest in both. An OCO order can be utilized on each cryptocurrency so that when a buy point is reached for one of them, the other order is automatically canceled.

For example, let’s say a trader is interested in buying Solana and Tezos, but doesn’t have enough capital to invest in both. Therefore, they set an entry order to buy Solana at the 61% Fibonacci retracement level near $143. Additionally, they set another entry order to buy Tezos at the 61% Fibonacci retracement level near $6.50.

The trader will then wrap the two orders together as an OCO. Therefore, the moment the first of those two orders triggers, the second entry order is immediately canceled, preventing two positions from being entered into.

This technique of OCO trading is especially helpful when dealing in leveraged products so the trader isn’t overleveraged in their account.

How to Place OCO Orders

Know what is an OCO order? Now it’s time to learn how to place it. How you set up OCO orders on various platforms will be different. Some platforms create an easy-to-understand user interface that packages the orders together for you automatically. Other brokers may require you to bundle your OCO orders together.

With the advance of new technologies, most brokers are providing easy-to-use interfaces that make creating an OCO order fairly simple.

For example, let’s assume that a trader wants to use TradingView to buy Bitcoin at the market price, using an OCO to manage risk.

When the trader checks the boxes next to “Take Profit” and “Stop Loss”, they’re creating two additional orders once they buy Bitcoin.

The moment the trader pushes the “BUY 1 BYBIT:BTCUSD MKT” button, they’ll be long one bitcoin. Simultaneously, they’ve established a take-profit limit order to exit the market at 7,500 points away, or at $61,105. Additionally, they’ve established a stop-loss order at 2,500 points away, at $56,105.

The take-profit and stop-loss orders are packaged together as an OCO. The moment either $61,105 or $56,105 is hit, the opposing order is canceled.

Other brokers might require you to create the individual orders, and then link them together. For example, the broker may suggest you create both the stop-loss order and the take-profit limit order individually. The broker would then allow you to link those together as an OCO. The important thing to remember is to check with the platform first to see how they handle OCOs.

The Bottom Line

With this guide, we hope your questions regarding what is an OCO order have been answered. Trading with OCO orders effectively helps both new and experienced traders navigate the volatile cryptocurrency market. Rather than watching each tick of the market, OCO traders can manage their risk using automation. This frees their minds to focus on analyzing other markets, or following the market’s price action.

The beauty of the OCO order is that you can straddle the current price with the appropriate order. Once one of the orders executes, the remaining order is automatically canceled. When it comes to managing your trades, OCOs can help keep it simple.

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