Note: Use a conditional order to place orders that will be submitted or canceled only if specified criteria are met. A conditional order is appropriate when it is important to automate part or all of the trade entry/exit order entry process.
Conditional orders are advanced trade orders that are automatically submitted or canceled if specified criteria are met. Conditional orders must be placed before the trade is entered, and are considered the most basic form of trade automation. Two common conditional orders are the order cancels order (OCO) and the order sends order (OSO).
One-Cancels-the-Other Order - OCO
An OCO allows traders to place several orders simultaneously. When one is filled, any remaining orders in the group are automatically canceled. The OCO is useful for both trade entries and exits. A bracket order, which places simultaneous stop and limit orders in the market (see Figure 6), is perhaps the most popular use of an OCO. In an OCO bracket order, once either the stop or limit orders are reached, the remaining order is automatically canceled. The stop order serves as a protective stop-loss order in case the trade moves in the wrong direction; the limit order serves as a profit target. A single OCO order performs the function of three separate orders:
1. A stop order (to protect against losses)
2. A limit order (to close the trade at a profit)
3. An order to close the remaining order
Figure 6 - An OCO that specifies profit target and stop-loss levels. When either is filled, the other will automatically be canceled. Image created with TradeStation.
It is important to remember that if a trader manually enters separate profit target and stop-loss orders (instead of using a conditional order) that the remaining order is not automatically canceled. In this event, the trader could end up with an unintentional (and perhaps even unknown) position in the market. As a hypothetical example, assume a trader enters a long position in stock XYZ. After the trade is entered, the trader places a stop order and a limit order. In this hypothetical example, the profit target (limit order) is reached and the trade is closed at a profit. Happy with the trading session, the trader heads out to the golf course.
Meanwhile, that stop order is still in the market. Price drops just enough to enter this short trade and then rebounds and takes off in a rally. Unbeknownst to the trader, he or she is now in a losing short trade that might get a lot worse, since it is unprotected in the market - without a profit target and without a stop-loss. Had the trader used an OCO to begin with, this would have never happened, since the stop order would have been automatically canceled as soon as the limit order was filled.
Traders can also use OCOs to trade breakouts and fades. A breakout OCO, for example, can be used to place simultaneous trade entry orders above and below the current price. A trader, for instance, may wish to enter a long position if price goes above a particular resistance level or enter a short position if price violates a support level. Once either level is touched, the corresponding order will be filled and the remaining position will be automatically canceled: one order is filled, the other is canceled. Examples of possible OCO applications are shown in Figure 7.
Figure 7 - Examples of OCO applications. Image courtesy PowerZone Trading, LLC.
Order Sends Order - OSO
An OSO order can further automate trade management by sending orders to the market once a trade entry order is filled. An OSO consists of a primary order that will send one or more secondary orders if the primary order is filled, and is used frequently in conjunction with an OCO to streamline the trade management process. An OSO, for example, could be set to trigger a bracket order as soon as a trade is entered. Assume the e-mini S&P 500 contract is currently trading at $1417.25 and we want to enter a long position at $1417.75 (see Figure 8). We want to take profits at $1420.25 and set a protective stop-loss at $1415.25. To break it down:
1. Enter a buy stop order to enter a long position if price moves up to $1417.75. Since this is a stop order, remember it is placed above the market.
2. Attach an OSO to the order to trigger a bracket OCO order once the entry order is filled.
3. Once price moves to $1417.75, the OSO will simultaneously open a long position, and place a sell stop order at $1415.25 (our protective stop-loss) and a limit order to sell for $1420.25 (our profit target).
4. Price reaches $1420.25. Our OCO order fills the limit order to sell at $1420.25. The remaining OCO order (the sell stop order at $1415.25) is immediately canceled.
Figure 8 - An OSO attached to the buy stop order automatically places a bracket OCO to give us a profit target and stop-loss, thereby protecting the trade. Image created with TradeStation.
Introduction To Order Types: Duration