April 13, 2011

Our Best Friend - The OCO Order...Also, IAG Breakout Pending!

An OCO (one cancels other) order is the best friend of a breakout trader that does not want to miss a move in either direction. The logic is very simple, and the benefits are numerous.

Placing an OCO stop order when trading breakouts:
  • Enormously limits risk
  • Reduces margin requirements while having the added open exposure of two orders
  • Allows you to only enter one order, but trade in two directions
  • Allows you to place a "good till cancel" order and never think about the trade again until it's filled
The main benefit is the risk limiting effect.  Imagine this.  In some sort of doomsday scenario, you trade a breakout with two separate orders.  Since you are not at your computer, the order is filled as the prices hit your stop levels.  The price breaks to the upside, your buy order fills.  Then it breaks to the downside in a quick whipsaw, and your short order fills.  You are now both short and long the stock...not good.

Anyway, to get you started with OCO stop orders, here's a trade for tomorrow.

IAG is making a double top right now, which may turn into a double bottom, which could turn into a long rectangle.  Nobody knows, but we'll prepare for anything!


Our support and resistance levels are 21.50 and 23.40, respectfully.  To take advantage of a breakout, we will place a "good till cancel" OCO order with a "21.38 stop sell" order (21.41 if you're feeling risky) and a "23.56 stop buy" order.

Now we forget about it until the order is filled one way or another.  Perhaps have a glass of wine, go to the beach, whatever!  Our stop level once an order is filled will be the support or resistance level it broke through when it initially broke out.  We have a nice, simple trade opportunity here.  My orders will be placed tomorrow morning.

Happy trading
~Chris Diodato
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4 comments:

  1. andrewApril 15, 2011 at 8:41 AM

    do you ever take outside recommendations or are all your picks from your own research?

    ReplyDelete
  2. Christopher DiodatoApril 15, 2011 at 9:13 AM

    I prefer to find my own picks, but I won't discard someone else's recommendation. Actually, if my analysis gives the same result of a fellow analyst, it only strengthens my conviction.

    The key is, never take a stock pick blindly. Always do what research you can on your own and see if it agrees with the stock "picker".

    ReplyDelete
  3. patrickApril 15, 2011 at 6:28 PM

    What's the end game for this trade now? With such a strong sell down today, especially at the close, are you holding to see if it breaks down through $19.50? Looks like if that happens the next stop may be $16.00.

    ReplyDelete
  4. Christopher DiodatoApril 15, 2011 at 7:37 PM

    I was actually away today, so I set a trailing stop that exited my short @ 20.23 this afternoon.

    Over the years, I've noticed that very often with short sales the target is nearly reached, but then the price immediately reverses. Therefore I usually exit at the target and prepare to re-enter another day.

    Therefore, if you want, hold it, but 20 is a psychological anchor so it may be strong support.

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