1. Introduction To Order Types: Introduction
  2. Introduction To Order Types: Long And Short Trades
  3. Introduction To Order Types: Market Orders
  4. Introduction To Order Types: Limit Orders
  5. Introduction To Order Types: Stop Orders
  6. Introduction To Order Types: Conditional Orders
  7. Introduction To Order Types: Duration
  8. Introduction to Order Types: Conclusion

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 one cancels other (also called order cancels order) order (OCO) and the order sends order (OSO).

One-Cancels-Other Order – OCO

An OCO lets you place several orders in the market 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 below), is perhaps the most popular use of an OCO.

In an OCO bracket order, once either the stop or limit order is 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.

Keep in mind, if you manually enter separate profit target and stop-loss orders (instead of using a conditional order), the remaining order isn’t automatically canceled – in which case you could end up with an unintentional (and perhaps even unknown) position in the market. Here’s an example. Say you enter a long trade in stock ABC. After you enter the trade, you place a stop order and a limit order. The profit target (limit order) is reached and you close the trade at a profit. Happy with the trading session, you head out for a round of golf.

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 you, you’re now in a losing short trade that might get a lot worse since it’s unprotected in the market – without a profit target or stop-loss. Had you 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. For example, if you want 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 automatically be canceled (one order is filled, the other is canceled). Examples of possible OCO applications are shown below. (For related reading, see The Anatomy of Trading Breakouts.)

 

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. They are used frequently in conjunction with an OCO to streamline the trade management process. You could use an OSO, for example, to trigger a bracket order as soon as a trade is entered. Assume an e-mini contract is currently trading at $1417.25 and you want to enter a long position at $1417.75 (see below). You 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. The 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
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