Understanding Conditional Investment Fidelity: Complex Strategies Explained

A conditional investment is an advanced trading strategy that involves setting order triggers for stocks, indices, or options contracts based on specific criteria, such as price movement or the execution of another linked order. Fidelity offers five types of conditional orders: Contingent, Multi-Contingent, One-Cancels-the-Other (OCO), One-Triggers-the-Other (OTO), and One-Triggers-a-One-Cancels-the-Other (OTOCO). These orders allow investors to automate their investment strategies and manage their risk. For example, a contingent order can be set to buy or sell a stock when it reaches a certain price or when an underlying index moves by a specified percentage. Conditional orders provide investors with more flexibility and control over their investments but do not guarantee full or partial execution due to the criteria that must be met.

Contingent orders

A contingent order triggers an equity or options order based on any one of eight trigger values for any stock, up to 40 selected indices, or any valid options contract. The eight trigger values are: last trade, bid, ask, volume, change % up, change % down, 52-week high, and 52-week low.

One-Triggers-the-Other (OTO) orders

• You place an OTO to buy XYZ at $30 and sell at a $2 trailing stop loss.
• The stock drops to $30, which triggers a buy order of XYZ stock that executes and...
• ...a sell trailing stop loss order with a $2 trail is placed with an initial trigger price of $28.
• XYZ moves up to $35...
• ...so the new trigger price for the trailing stop order is $33.
• XYZ trades down to $33, which triggers the trailing stop order and shares are sold at the market.

The primary and secondary orders can have different times in force. For OTO orders that are good 'til canceled (GTC), the whole order is good for 180 days (e.g., if the primary order executes on day 30, the secondary order is live for 150 days). If the primary order is canceled, the secondary order is also canceled. However, if the secondary order is canceled, the primary order remains open as a separate order.

One-Cancels-the-Other (OCO) orders

A One-Cancels-the-Other (OCO) order is a type of conditional order that allows an investor to place two orders at the same time, with the execution of one order triggering the cancellation of the other. This allows investors to take profit while minimising potential losses.

OCO orders are often used by traders who want to enter a trade but limit their losses if the trade goes against them. This can be achieved by placing two separate orders: Order A and Order B. Order A is set to execute if the price of the security reaches a certain level, and Order B is set to execute if the price of the security falls to a certain level. If Order A is executed, Order B is automatically cancelled, and vice versa. This enables traders to set up two different scenarios for the security they are trading.

For example, if a trader thinks that a stock will either break out to the upside or break down to the downside, they could set up an OCO order with a buy limit order above the current price and a sell limit order below the current price. If the stock price breaks out to the upside, the buy limit order will execute, and the sell limit order will be automatically cancelled. Conversely, if the stock price breaks down to the downside, the sell limit order will execute, and the buy limit order will be automatically cancelled.

There are two types of OCO orders:

• OCO Limit — simultaneously places a Limit Order and Stop-Limit Order
• OCO Market — simultaneously places a Limit Order and Stop-Market Order

OCO orders can be used in combination with other types of orders to create more complex trading strategies. They can also be customised to fit a trader's specific needs, such as setting different stop-loss and take-profit levels for different trades.

However, OCO orders may result in partial fills, where only part of the order is executed while the other part is cancelled. This can occur if market conditions change rapidly. Additionally, OCO orders may be more complex than traditional orders, requiring more knowledge and expertise to use effectively.

One-Triggers-a-One-Cancels-the-Other (OTOCO) orders

A One-Triggers-a-One-Cancels-the-Other (OTOCO) order is a type of conditional investment strategy. Conditional orders are executed based on an external trigger, such as a market condition, or the execution of another order linked to it.

In a One-Triggers-a-One-Cancels-the-Other order, a primary order is placed, which, if executed, triggers two secondary orders. If either of these secondary orders is executed, the other is automatically cancelled. This type of order is used to place a buy order and two corresponding sell orders (above and below the market) on the same security at the same time. The execution of the buy order triggers a One-Cancels-the-Other (OCO) order to sell. The execution of either leg of the OCO order triggers an attempt to cancel the unexecuted order.

OTOCO orders are commonly used to manage trading risk and save time. They can be used to set profit and stop-loss targets. For example, an investor can set the order to sell Bitcoin at a desired profit target and simultaneously place a stop-loss order to limit potential losses if the price goes down.

Trailing Stop Orders

A trailing stop order is a type of conditional order that adjusts in price with favourable market movement on the security. They follow the same trading principles and mechanics commonly associated with stop orders.

There are two types of trailing orders: a trailing stop loss and a trailing stop limit. Both can be set in dollars or percentages. A trailing stop loss, once triggered, will become a market order. A trailing stop limit, once triggered, will become a limit order. This means that your order will need to reach the limit price twice: once to trigger the order, and the other to execute it.

There are four different types of trailing stop orders to choose from:

• Trailing Stop Loss in Dollars
• Trailing Stop Loss in Percentages
• Trailing Stop Limit in Dollars
• Trailing Stop Limit in Percentages

Frequently asked questions