One Cancels the Other Order (OCO) is an extremely useful device which allows you to program your trading, and goes a step beyond the Parent and Contingent Order. This is an advanced type of order which links two orders. In this instance the execution of the first order will mean the automatic cancellation of the other order linked to it. Often, although not always, the OCO order consists of a stop loss and a limit order placed on either side of the prevailing market price. As soon as one is executed, the other one will be cancelled.
For example, with a long position a stop loss order would be placed below the market to limit the loss, and a limit order would be placed above the market to close the trade for a profit. If the trade becomes a loss, the stop loss will be triggered and the limit order cancelled; if the price rises to the limit, the position is liquidated for a profit and the stop loss order goes away. Some providers even offer variations on this order, such as One Triggers a One Cancels the Other Order (OT/OCO). An example of using this would be if you saw the possibility of a breakout in a range trading financial security.
In this case, you would place a buy stop order above the resistance level, as the start of the OT/OCO order. This would have the effect of buying the security if it broke out through the resistance. When this order is filled, it triggers the OCO order, which would include a stop loss order just below the resistance level in case the breakout failed, and a stop limit order at the target price, which might typically be the height of the range above the resistance. Either way, when one of these stop orders is fulfilled the other order is cancelled, so either you cut your losses if the breakout retraces, or you capture your profits if it performs as expected. This type of order is sometimes known as a bracket order.
ABC stock is trading at $19.00 and you have a long CFD position at $18.75. You want to take profit if the price goes up to $19.50 and but you also want to be stopped out should the price go down to $18.50. You can place an OCO order: 'Sell ABC stock @ $19.50 on limit OCO $18.50 on stop'.
As you can see, this is almost automatic trading, and all you have to do is decide on the price levels that you want to insert. But even this does not fully exploit the power of the One Cancels the Other Order. Say you have only limited funds, and you are interested in two different financial securities that are approaching a good setup position. You could split your account between them, but if you want to invest in one or the other and don't have time to watch the markets, you could also use the OCO order.
All you need to is issue an OCO order to buy a number of shares in security A at a limit price, or to buy a different number of shares in security B at a different limit price, working out in each case how many shares you can afford to buy with the funds available. The effect of this is that you buy either A or B, depending which one meets your conditions first, and when that order is filled the other order is cancelled automatically so that you do not overspend. As you may not know which if either of these securities is going to breakout or start trending, this gives you a much improved chance of getting into a profitable trade without over committing yourself.
Finally, even this does not express all the options, as some brokers allow you to place a One Cancels All (OCA) type of order. This allows you to submit more than two orders simultaneously, and if any of them is filled all the others are cancelled.