A Foolproof Guide to CFD Trading: OCO Orders

Lee Yong Shern, CFD Dealer

Published On: 20 February 2020 | 11:00 AM

“Always start at the end before you begin. Professional investors always have an exit strategy before they invest. Knowing your exit strategy is an important investment fundamental.”
– Robert Kiyosaki.

Fellow CFD traders, I have a question for you.

Have you ever wondered whether there is an order type that will set2 orders concurrently, one to take profit and the other to cut loss, where if one order is filled the other will be cancelled?

Have you ever wondered whether there is a risk management tool that can help you to manage your trading exit strategies?

The good news is that you can do both through One-Cancels-the-Other (OCO) orders!

Definition of an OCO Order

An OCO order is defined as a set of 2 instructions to fill the order at the price you wanted (better off) or to fill the order once it has reached a certain target (worse off) price. When the limit order is triggered, the stop limit order will be cancelled automatically. If stop price is reached, the stop limit order will be triggered or filled and the limit order will be cancelled.

An OCO order requires the user to set 3 different prices:
i) limit price (take profit)
ii) stop price
iii) stop limit price (cut loss)

To illustrate, here are 2 different scenarios for OCO orders.

 

Scenario 1: CFD price moves in your favour (better off)

In the first scenario, you purchased your shares at an entry price of S$1.00. You set your limit price at S$1.15 and your stop limit price at S$0.95.  The limit order is triggered when the share price hits S$1.15 and the stop limit order is cancelled automatically.

 

Scenario 2: CFD price moves against you (worse off)

In the second scenario, the stop limit order is triggered when the share price drops to S$0.95 and the limit order is cancelled automatically.

Top 3 Benefits of using an OCO Order

1. Risk-Reward Customization

 

 

OCO Orders allow you to customise your risk reward ratio. Risk-reward ratio is defined as the relationship ratio between your potential rewards and risk taken.

With a pre-determined risk-reward ratio, you are able to determine the exit points for both your pre-determined take profit and cut loss points. OCO orders allows you to set your exit points during your trade execution.

Below is an example of an OCO order application by a fictional person called “Ms. A”.

 

Shares XYZ
Quantity 10,000
Entry Price S$1.00
Target Price (Limit Price) S$1.15
Stop Price S$0.95
Stop Limit Price S$0.95

(Assumption: No commission and finance charges involved) 

 

To maximise gains and minimise losses, Ms. A adopted the risk-reward ratio of 1:3, a maximum loss of S$500 and a gain of S$1,500, which is equivalent to S$0.05 of loss or $0.15 of gain in each unit of XYZ share.

 

Scenario 1: The share price went down to S$0.95 Scenario 2: The share price went up to S$1.15
Original Investment Long XYZ CFD

S$1,000

Long XYZ CFD

S$1,000

Quantity (shares) 10,000 10,000
Entry Price S$1.00 S$1.00
Profit/(Loss) 10,000 * (0.95-1.00)= -S$500 10,000 * (1.15-1.00)= S$1,500
Risk-reward ratio 1 3

Potential Scenarios

By sticking to her risk-reward ratio of 1:3, Ms. A risked S$500 for a profit of S$1,500. However, do note that if the counter gaps up or down, Ms. A’s orders may not be filled.

You may also refer to our previous article to understand more about stop limit orders.

 

2. Protect Profit 

Holding a position that is deep in the money? You could utilise an OCO order to maximise your profit and set a minimum profit in the event of trend reversal. This ensures your winning position will be protected while still staying in the trading game. You can do so by setting the limit order price as your profit target and using the stop limit order (minimum profit) to protect your gains that have been accumulated.

 

3. Minimal monitoring

Lots of meetings during the workday? Have family commitments and kids to look after? Can’t be on the trading screen 24/7? Not to worry!

Regardless of which trading strategy you choose to employ, you can semi-autopilot it by utilising OCO Day or OCO GTD* order anytime. You can pre determine your take profit and cut loss points without manual interference and monitoring.

*Please  note that OTO GTD orders are only available for Singapore Equity CFD & CFD DMA.

How do I place an OCO Order?

With an existing long position (Take Profit or Cut Loss)

Submitting an OCO Order (Having an existing long position)

 

Steps to submit an OCO Order:

Log into POEMS 2.0 or Poems Mobile → Trade →  Select CFD Counter

Step 1: Submit your sell limit order above the market price to take profit (better off)
Step 2: Change the quantity
Step 3: Identify your stop sell price
Step 4: Choose to trigger based on either bid or ask
Step 5: Enter stop sell limit price (worse off)

 

With an existing short position (Take Profit or Cut Loss)

Submitting an OCO Order (Have an existing short position)

 

Steps to submit an OCO Order:

Log into POEMS 2.0 or Poems Mobile → Trade →  Select CFD Counter

Step 1: Submit your buy limit order below the market price to take profit (better off)
Step 2: Change the quantity
Step 3: Identify stop buy price
Step 4: Choose to trigger based on either bid or ask
Step 5: Enter stop buy limit price (worse off)

Please note that such order types may not be available for certain CFD products and markets.

Conclusion

A sustainable trading journey consists of sound risk management. It is about cashing in on your big wins and cutting your losses early. OCO orders allow you to customise your risk reward ratio by allowing you to determine your take profit and cut loss points as well as protecting your long-accumulated gains. OCO orders are one of advanced tools provided by us to aid you in your trading journey.

If you are interested in knowing more about CFDs, we offer FREE education seminars which you can attend to learn more about this derivative product!

Submit OCO orders via both POEMS 2.0 and POEMS Mobile now!

 

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