How Does the Order Cancels Others Move Work?
Order cancels others or OCO is a two sided order that occasionally is used to range a price when you are not sure about the price direction and instead decide to go with the breakout either way. This type of order states that if one part of the order is filled the other part of the order is canceled. Actually this type of order is a mixture of 2 limit orders and / or stop – loss orders. Two orders with price and period variables are positioned above and below the present or current price.
Considered to be a dual specification, “order cancels others” commands the floor trader to load one of the other of two orders. When the market decides to let one of these two to be executed or carried out, the transaction is considered complete and the second order is then considered canceled. The order cancels others are used primarily as an exit strategy by customers to assists them in either capturing gains or avoiding losses. If a position price is reduced, a stop loss order slashes the loss, and the limit order is canceled. So if the price increases, a limit order try to capture the gain, and the stop loss order is canceled.
Since the broker is given both orders so that each can be filled in the suitable place in his deck, the member firm employee must be certain to get both orders back from the broker when one is filled, checking to be sure the other order has been called and not full in error. An investor with inadequate funds may lay an order to buy both stocks and bonds and specify that it’s a “one-cancels-other-order”.
In short, if the market supports stocks and they are bought, the order to buy bonds will be canceled. On the other hand, if the market proposes that bonds are the way to go, the order will be to buy bonds and the order to buy stocks will be canceled. For instance, an investor can put a stop-loss order and a limit order on one stock as a one cancels other order. So if the price of the stock turns down then the limit order is canceled and the stop order is carried out in order decrease losses. If the price of the stock boosts then the stop order is canceled and the limit order is executed.
You can also place two separate orders in this situation, but the trouble is that both may be filled in a wavering market. You could be imprisoned into a quick loss or end up with a larger position than you desired.
For example, you decided to go short in a market so you had OCO order placed, one limit order above current price to sell if ever prices go up and one stop order below the current price. You only have to get one position, but prepared for both eventually. This type of order tells the broker to fill one order, not for both of them, to get you short whichever way prices move.