Do you know what limit orders and stop orders are? Simply put, limit orders place limits at which you would want to buy an undervalued currency, or sell an overvalued currency. Likewise, stop orders are exactly the opposite, and place limits at which you would want to sell an undervalued currency or buy an overvalued currency to avoid making a bigger loss.
Combine the two and you have one of the most potent weapons in the forex arsenal: One Cancels the Other (OCO) Orders.
To put it in the easiest terms possible, OCO orders just mean that you're accounting for both possibilities, i.e. profit and failure. So the minute one order is fulfilled, the others is cancelled and becomes null and void.
In many situations this can be put to use to limit your potential losses, while maximizing your potential profits.
Take this example:
Let’s assume that at the current exchange rate for Euro/US$ is 1.3228/32. What this means is that you can sell 1 Euro for 1.3228 US$ or sell 1.3232 US$ for 1 Euro. In other words, if you were to convert 1 Euro to 1.3228 US$ (by selling that 1 Euro), you wouldn’t be able to immediately convert back for 1 Euro because you’d have to sell 1.3232 US$ for 1 Euro.
So let’s just say that your full order was as follows:
Buy Euro: 1 standard lot Euro/US$ @ 1.3228 = US$ 132,280
Pip Value: 1 pip = $10
Stop Order = 1.3208
Limit Order = 1.3328
What this means is that you’re going to be spending US$ 132,280 to buy 100,000 Euros, expecting the price to rise so that you can make a profit. But you’ve put an OCO order in, with a stop order at 1.3208.
Thus, is the sale price of Euros to US$ falls to 1.3208, you’ll be selling it off immediately and getting back US$ 132,080 – which means that you’ll have made a $200 loss (20 pips)
However similarly, you have a limit order for 1.3328, so if the sale price of Euros to US$ rises to 1.3328, you’ll sell it off immediately and get back $133,280 – which means that you’d have made a profit of $1,000 (100 pips).
Based on this example, you should see how setting up an OCO order can help you to define you acceptable loss margins and also determine when exactly you want to sell for a profit. If you didn’t have such an order in the above example, and the sale price of Euros to US$ fell below $1.3 or something, you’d have stood to make a huge loss.
But as things stand, with the OCO, you’d avoid that scenario completely.
Now that you know how to use the full potential of One Cancels the Other orders, you’ll find that you’re much better able to manage your forex transactions!