David Waring

In our last lesson we continued our module on how to place stock trades, with a look at how to close open trades using market, stop, and limit orders. In today's lesson we are going to cover an advanced order type, which is called a One Cancels Other Order, or OCO for short.

As we discussed in our last lesson, stop and limit orders offer traders a convenient way to automatically close their positions when either their loss limit or profit target for a trade is hit. As we also discussed however, placing stand alone stop and limit orders can leave a trader exposed to one of the orders triggering a new trade if the other order rate is hit in the market.

To combat this problem the ThinkorSwim and many other platforms offer what is known as a One Cancels Other order or OCO for short. The OCO order functionality, allows traders to place both a stop and a limit order which is tied to an open position so that if either the stop order or the limit order price is hit the open position will be closed by whichever order was activated by the market, and the opposing order will be automatically canceled by the platform.

To gain a better understanding of this, lets login to our ThinkorSwim paper trading accounts and place an OCO order. If you have not done so already, I encourage you to push the pause button, and click the link above this video where you can register for a ThinkorSwim demo account, so you can follow along as well.

As many traders will already know the levels that they wish to exit a trade should the market move in their favor or against them, the ThinkorSwim platform allows the trader to open a new trade and specify their OCO stop and limit orders to be activated when their new trade is executed. As an example, lets say that we want to sell 100 shares of Walmart because we feel that the price of Walmart's stock is going to fall by $4. If the price of Walmart stock does fall by $4, then we want to be taken out of our open position for a profit. If we are wrong however, and the price of Walmart stock falls by $2, then we want to be taken out of our open position for a loss.

To open this trade with a $4 limit and a $2 stop tied automatically to the position we will right click on the bid price (since we are selling to open the trade), and then select "sell custom" from the dropdown menu that appears. After selecting "sell custom" another menu will appear where we want to select "with OCO bracket". Once you have done this you should see the order window populate with your order to open the position, as well as the stop and limit order which will be used to exit the trade automatically if our profit target or loss limit is hit.

For this particular example I want to sell at the market, so I am going to change the order type for the first order to "at market". For the second order which should be the limit order, I am going to change the price column to +4 because I want to be taken out of the trade if the market moves in my favor by 4 points. For the third order which should be the stop order, I am going to changet the price column to -2, as I want to be taken out of the trade if the market trades against my by 2 points. I want these orders to remain active as long as my new position is open, so I am going to change the rules column from "Day" to "GTC" or good till cancelled.

I now have an order to sell 100 shares of Walmart at the market, which will then activate a limit to take me out of the position if the market trades lower by 4 points, and a stop to take me out of the position if the market trades higher by 2 points. Because these orders are OCO if my stop is hit then my limit will automatically be canceled, and vice versa.

Once you are comfortable that you have set the order up correctly, go ahead and hit the confirm and send button, and then finally the send button in the confirmation window to execute the trade. Once you have done this the sell order should executed putting you short 100 shares of Walmart stock, and protecting your order with an order to close the position if the market trades higher by $2 or lower by $4.

That's our lesson for today. In our next lesson we will look at the last major type of order that traders use, which is referred to as the trailing stop, so I hope to see you in that lesson. As always if there are any questions or comments please leave them in the comments section below, and good luck with your trading!

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Unregistered

Thank you for the explanation on the OCO orders.. helped a ton
Tony

Unregistered

Very good.Better explanation than the TOS website.