How it works
The trader places two orders simultaneously: typically a stop-loss below entry and a take-profit above entry (for longs; mirror for shorts). The broker links them. If the take-profit fills first, the stop-loss is cancelled. If the stop-loss fills first, the take-profit is cancelled. This prevents the common error of one side filling and the other side later triggering on a price retracement against an already-closed position, accidentally opening a new opposite-direction trade.
Example
A trader holds 100 shares of XYZ bought at $50. They place an OCO: stop-loss at $48 and take-profit at $56. XYZ rallies to $56: take-profit sells 100 shares; the $48 stop-loss is automatically cancelled. Without OCO, if the trader had placed two unlinked orders, after the take-profit sold the 100 shares, the $48 stop-loss would remain active. A later drop to $48 would trigger it, accidentally opening a 100-share short. OCO eliminates this risk.
Why it matters
OCO is the standard way to bracket a position with defined risk and reward. Most platforms also offer OCO for entry: place a buy-stop and a sell-stop on either side of consolidation; the breakout direction fills, the other cancels. Always use OCO instead of two manual orders for stop-loss + take-profit. The operational discipline cost is zero; the protection against accidental opposite-direction fills is significant.
