Managing Risk with One Cancels the Other (OCO) Orders in Forex Trading

March 4, 2009 by  
Filed under Forex Trading

Risk management strategies are multiple and necessary in Forex trading, due to the high volatility of the currency exchange rates. Several different types of orders, such as stop and limit orders, are utilized to lock in profits and prevent drastic losses. However, another type of order, the One Cancels the Other, or OCO, is very easy to employ and may be more effective that the stop and limit options.

Let’s assume that the dollar and euro currency pair is trading at 1.3423. This means that 1.3423 euros equal a dollar, but this can change significantly in a short amount of time. If the rate falls to 1.3400, you may want to place a stop order at 1.3392 to reduce your possible losses if it continues to fall.

These stops are places with enough room to allow for slight fluctuation, without drastic reduction in price. If the rates drop a mere 5%, you may want to stay in, but limit the possibility of loss somewhere along the line. A future 20% drop may make you wish you’d left after losing 10% of your money!

Timing the Forex market is very tricky, if not impossible. It’s influenced by such a vast array of information and international activity that it’s very different than the slower-moving stock market. So, it’s unfortunately impossible to predict when the rates are at their peak before turning downward.

This is where an OCO order can help to maintain profits and reduce risk of loss. OCO asks the broker to perform an order based on more than one condition. This could include placing both a stop order and a limit order at the same time for any one exchange. Now, when one condition is met, the other order is cancelled out.

An OCO may also be used to mix and match your investment choices. Let’s say you can’t decide which currency pair to buy, but like both the dollar/euro and dollar/yen. You can place orders to buy the dollar/euro at $1.2354 and the dollar/yen at $1.2465, and whichever happens first, the other is ignored and the first is carried out.

This method allows you to leverage your information and the current action of the market to cash in on possible profits as well as prevent unrecoverable losses.

As a beginner, it’s important to learn as much as possible about the historical patterns of the Forex market, how to utilize different types of orders, and how to predict future movements. The Forex trading software available on the Forex website will allow novices to become familiar with what works for them, and practice trial trades.

Ensure you are tracking your progress and reassess after every practice buy and sell to determine what you should change for the next practice session. Doing this one thing several times will save you a ton of money in the long run, and prevent you from going blind from all of the potentially-confusing data involved in Forex trading.

  • a
    a