When trading the commodities markets or the Forex market, the term OCO is often you used as part of opening an order. When OCO is added as an open order it can be part of a very important trading strategy. Under certain circumstances, not using it could lead to opening an unwanted trade and costing you a lot of money. Therefore, knowledge of the OCO order is very important if you want to find success trading the Forex, or actually any type of market. In this article, we will explain what the term OCO refers to and exactly what an open order is as well.
An open order is certainly one trading concept that is easy to understand. It simply means you place a particular order and wish to have it remain as an order to be filled until it is actually filled. Another term for an open order is OTC, which means open till canceled. As you can see, this is grammatically incorrect because it should actually read OUC, or open until canceled. However, OTC is the lingo that has been used in trading markets forever.
A trader has the opportunity to place open orders regarding the same trade at the same time. Why would anyone do this? Because a trader may look to close a winning trade when it reaches a certain level and at the same time protect himself against losses should the market turn against him. For instance, he may seek to grab profits on a winning trade should the market move in his favor. If this trader looks to get out with a profit of 20 pips, he would place a limit order of 20 pips above where a particular buy order was filled or below the point where a particular short order was filled.
By doing so, the trader will lock in profits as soon as soon as the Forex pair reaches this level. However, the market could turn against this trader and cause a major loss of funds. Therefore, it would be wise to place a stop loss order in the opposite direction of where the limit order had been placed. Of course, the limit order and the stop order would be open orders or OTC orders. So, what would happen if the commodity moved to the level where the limit order had been placed? This would be great because the trader would now have locked in a profit of 20 pips.
The bad news is this commodity may turn in the other direction and trade at the stop level he had previously placed. If this happened he would now hold another position in the opposite direction of where he previously held his last position and this person may not want to be engaged in this trade. What's worse is he may not even realize this. This of course, would make it possible for him to lose a lot of money.
To prevent this from happening, the correct procedure is to open both the stop order and the limit order at the same time and to open them specified as an OCO order. This way, when either the stop or the limit order is filled the other will be canceled immediately. This will prevent these unknown losses from ever occurring. Here in lies the power and beauty of using a Forex OCO order.