It’s no secret that foreign exchange markets are known for constant fluctuations and volatile rate swings. Even though this volatility can work in your favour, it also brings significant risks. This is why using strategies such as one-cancels-the-other or OCO orders to limit risk exposure, reduce losses, and optimise profitability.

Take a closer look at these orders, how they work, and what their advantages and disadvantages are.

What is an OCO order?

If you’re new to foreign exchange, you might be asking the question, “What is an OCO order?” An OCO order lets you place two different types of FX orders, such as a stop loss order and a limit order, simultaneously. As the two orders are paired, one will be automatically cancelled when the other is executed. This means you can better manage your risks by setting specific entry and exit points for your trades, and you can reduce the need to constantly monitor the markets by automating your trades.

The two orders paired in one of these orders cannot be executed at the same time. As the order name suggests, the execution of one of the two orders automatically triggers the cancellation of the other.

To illustrate OCO orders with an example, let’s say you buy USD 100.00 for GBP 80.17 (at a GBP/USD rate of 1.25) due to speculation that USD is likely to increase in value against GBP. You can use an OCO order to increase your profits if your prediction is correct, or to minimise your losses if your prediction is incorrect.

To do this, you can place a take profit order at 1.4 and a stop limit order at 1.2. If the rate rises to 1.4, your sell order will execute and your stop limit order will be cancelled automatically. However, if the rate drops to 1.2, your stop limit order will execute and your take profit order will be cancelled automatically. The sell order will be placed only if the market reaches or exceeds your predetermined trigger rate.

The purpose of an OCO order

The main purpose of an OCO order arguably is to automate your exchange rate trades in a way that reduces losses, increases, or protects profitability, and doesn’t require constant monitoring of the markets. These orders allow you to link two separate orders, usually limit and stop loss orders.

Thanks to these orders, you can define your risk and reward lines with ease, which allows you to leverage positive currency fluctuations while protecting yourself from foreign currency exposure. It’s best to use one-cancels-the-other orders when you predict a significant move in the market but are unsure of the direction the move will take, and when you simply do not have the time to monitor exchange rates continually.

Advantages and disadvantages of an OCO order

Knowing the advantages and disadvantages of OCO orders can help you decide whether to use them for your FX.

The advantages of these orders include more effective risk management, protecting your profit in the event of the market reversing, and making your FX trading more efficient through automation. The disadvantages include complexity in setting up and managing them compared to other orders, the lack of guarantee of execution, and limitations in fast-moving markets by not executing as quickly as you would like them to.

Sign up for a business account with Moneycorp

These orders can be particularly helpful for anyone interested in buying and selling foreign exchange while managing risk, protecting profits, and doing so efficiently. Along with OCO orders, stop loss orders, and limit orders, we offer a range of other FX solutions. Sign up for a business account with Moneycorp and take advantage of solutions that can work for you.