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Prior to the advent of online brokers and the software and technology that this revolution spawned, most traders were limited to only a few types of orders, such as market and limit orders. Contingent orders such as the one cancels other orders, can be a great tool for swing traders. TradeKing offers this facility in their online trading platform along with other brokers. For more information on this feature at TradeKing along with some ways of using it, click here.

While not all brokers offer this feature, it is a great way to manage risk for an end-of-day swing trader. For example, I am not able to, nor do I want to by a trader who has to sit in front of computer all day. The ability to use OCO orders, allows me to better manage my risk on swing trades.

My methodology is as follows:

I have a number of scans which I run after the market close to develop some swing trading ideas. Utilizing my criteria, I review the scans and determine which stocks I want to trade.

The next step is to determine my entry and exit points. One of my exit points will be my stop loss, the other will be my targeted profit. This is where the OCO, or one cancels other order comes in handy. Once I am in the trade, I can put in an order for the stop loss and another order for a profit target. This way I lock in a potential profit while protecting my capital.

Lets look at an example:

Here is a stock that came up in a scan. If I decided to trade this stock, I could set an initial target at the previous high of $33.66, and a stop loss just below the last pivot low at about $30.00. Suppose, I place an order to buy 200 shares of the stock in the morning and set an alert to let me know when I am filled. Now, suppose my I do get filled at $31.53 (today’s close in this example). I would then set a stop loss order at $30.00 for a risk of $1.53. My target for half my position is the previous high or $33.66, for a possible profit of $2.13. I could then place a limit order to sell at this price. Now, if the stock rises to this value, I will be sold out of half my position and the stop loss order will be cancelled. I can sleep better knowing what my risk is as well as knowing I have some profit however small. Also, I can keep moving up the stop loss as the stock rises, reducing my risk each time.

The purpose of this example is not to recommend this particular stock but to illustrate a way to use the OCO order to manage risk.

If your broker does not have this capability, you may want to find one that does. This type of order gives you the flexibility to swing trade on an end-of-day basis, by giving you the ability to better manage your risk.

Shalini Gupta