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What Is an OCO Order? Why Is It Useful for Traders?

Risk management is critical when trading any asset, but it's especially significant in cryptocurrency. Since price swings in crypto are volatile, short-term traders need strategies to preserve their capital in case a trade doesn't work out. OCO orders are one way that traders can protect themselves when entering and exiting the crypto market. 

If you’re interested in trading cryptocurrencies, review what an OCO order is and why this technique is common with these volatile assets. Putting an OCO order into place can help take some of the guesswork out of high-risk crypto trading. 

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What is an OCO order?

Before we dive into what OCO stands for, let’s understand an OCO order. 

An OCO order is a trading strategy that involves placing two automatic buy or sell orders on an asset simultaneously. The distinguishing feature of an OCO order is that only one of these two trades can ever get filled. Indeed, "OCO" is an acronym for "One-Cancels-the-Other," which succinctly explains how this strategy works. Once the market price of an asset crosses the preset price for one order, it’ll instantly cancel out the other order. The idea is to limit the potential loss by automatically selling if the asset hits a floor price while ensuring one locks in winnings by automatically selling if the asset hits a certain ceiling price. 

Most brokerage accounts allow clients to use OCO orders on tradable assets like an OCO stock order. It's also possible for crypto traders to create OCO orders on many centralized crypto exchanges (CEXs)

We’ll also take a look at an example of an OCO order, but it's essential to review limit orders and stop orders first. Traders who set up an OCO order will use these trading strategies. 

Limit orders vs. stop orders: Components of an OCO order

OCO trading always involves limit and stop orders. While these order types are similar, there are a few nuances traders need to know when building their OCO strategy. 

What is a limit order? 

Limit orders tell an exchange you want to buy or sell an asset at a preset price. Your broker will fill your buy or sell request when your limit price matches the market price. Limit orders are always publicly viewable, so market participants will see you're ready to enter a trade if the market price meets your specifications.   

Unlike limit orders, market orders will instantly fill once you open a position. With a market order, the price of your desired asset or crypto doesn't have to hit a predetermined price. Once you put a market order into motion, your broker will instantly buy or sell your shares at the current rate. 

For example, let's say shares of Microsoft (MSFT) are trading for $230 per share. If someone sets a limit buy order for five shares at $220, they’d only receive these shares if MSFT hit $220 or lower during a trading session. 

In another scenario, someone already holding MSFT stock might open a sell limit order for five shares at $245. The shareholder's broker will only sell these shares whenever the market price of MSFT hits $245. 

What is a ‘stop price’? 

Stop orders share some features with limit orders but serve a different function. Most notably, stop orders aren't publicly viewable on the stock market. When an asset hits your "stop price,” your trade becomes "active." The stop price is the dollar amount when your stop order transitions to a limit or market order. 

In other words, the stop price is the target level that puts your trade into motion. Just because an asset reaches your stop price doesn't mean a broker will fill your order. All your trade parameters need to be met before a stop order is fulfilled. 

To better understand what a sell stop is, let's say you want to sell one bitcoin (BTC) if the price falls to $15,000 per coin. You could set a stop-limit sell order with the following parameters:

  • Stop price: $14,000 per BTC
  • Limit price: $15,000 per BTC

In this case, you first need BTC to fall to $14,000 to start your limit order. If BTC dips to $15,000 and then continues upward, it won't trigger a sell event because it didn't hit your stop price first. Also, after BTC hits $14,000, you would need it to rise again to $15,000 to activate your sell limit order. If Bitcoin continues going down after passing $14,000, your limit order won't fill.

In some instances, stop prices can provide extra protection for traders as they develop their strategies.

Example of an OCO order

Now that we’re clear on limit and stop orders, let’s look at an example. To better illustrate an OCO order, let's assume a crypto trader has a large position in Solana tokens (SOL) that they want to sell. At the time of writing, SOL’s price is $32.63 per token, and the trader's average price per SOL is $37. A potential OCO order set-up might look as follows:

  • Sell limit order at $42 per SOL 
  • Stop-limit sell order with a stop price of $22 per SOL and a limit price of $23 per SOL

In the favorable scenario, SOL would hit $37 per token, and the trader would receive $5.63 profit per token. However, if SOL fell to $22, it would trigger the limit order to sell at $23. Therefore, if SOL rises back to $23 in this second example, it would sell the trader's tokens for a $14.63 loss per token.

Remember that an OCO order only submits the first order that gets filled. Therefore, once the limit order for $37 is complete, the stop-limit order at $22 and $23 will go away. The same could be said if the lower stop-limit order hits first. 

Why do crypto traders use OCO orders?

Short-term traders are most likely to use OCO orders, but long-term investors can also employ this strategy on most exchanges. Here are some features that can make OCO orders worthwhile when assessing how to buy or sell crypto assets: 

  • Risk management: Users primarily deploy OCO orders to manage their expected gains and losses. The two prices set for an OCO order limit a trade's potential upside and downside. By setting the upper and lower thresholds for position, it's easier to calculate potential gains and losses. The risk management that OCO orders provide may benefit those using high-risk trading practices like leverage trading
  • Decreases crypto volatility: OCO orders can take some of the volatility out of the crypto market. Crypto prices move more erratically than traditional assets like stocks or precious metals. By setting two limit orders, crypto traders can avoid steeper losses or ensure they lock in profits during a bull run
  • Technical analysis traders: Some crypto traders study chart patterns to determine favorable short-term trading opportunities. There are many metrics that technical traders can use to determine a "good" time to enter a trade. For instance, moving average trendlines, volume charts, and the relative strength index (RSI) may help decide when to enter a trade. Technical crypto traders consider all these factors when choosing the prices to set their OCO orders. 
  • Automates the trading process: OCO orders take emotion out of crypto trading. After setting the price levels, you don't have to monitor crypto prices 24/7. Once your price targets are met, an OCO order will automatically put your trade into action. You can go about your day and let your exchange handle your trade whenever the first price is met. 

Are there risks to using an OCO order?

OCO orders limit your potential gains and guarantee potential losses. While this may be a "good" feature for short-term traders, it's not ideal for most passive investors. If you're holding crypto for the long term, it may not be beneficial to constantly trade in and out of your portfolio. Not only is there a greater risk of realized losses, but there are also tax and fee implications every time you make a trade. 

Not to sound too pessimistic, but you’ll always lose money whenever the lower threshold of an OCO order is triggered. Even if a crypto's price recovers a few weeks later, you can’t undo an OCO order. Depending on the situation, it may be better to hold cryptocurrencies during bear markets or research investment strategies like dollar-cost averaging (DCA)

Where are OCO orders available for crypto? 

Many CEXs with advanced trading functions like limit and stop orders will enable OCO orders. A few major crypto exchanges that offer this feature include (at the time of writing):

  • Binance
  • Bitfinex
  • Bybit 
  • Exchange 
  • KuCoin
  • Phemex
  • TradingView

The best practice here is to not assume a CEX will always offer OCO orders because it has limit order or stop price features. Always review the supported order types on your preferred trading platform to see if OCO is included. 

Wrapping up

Typically, only short-term crypto or stock traders use OCO orders to protect their positions. However, long-term investors sometimes use this strategy whenever they want to liquidate their holdings within a specific price range. While an OCO order isn't for everyone, it's a common strategy that can adjust a trader's risk profile.

At Worldcoin, we believe in the long-term potential of blockchain. Although there are many short-term traders in today's crypto market, we envision a future where you don't have to constantly convert your crypto to make daily purchases. We aim to put a share of our crypto in the hands of every individual for free. We’re also airdropping free DAI tokens to anyone who downloads our app. Subscribe to our YouTube channel to learn more about the cryptocurrency market. 

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