Why would people use OCO or OTOCO conditional trades?

Question

I've recently been looking into placing conditional orders and came across these two types of conditional orders:

• OCO (One-Cancels-the-Other)
• OTOCO (One-Triggers-a-One-Cancels-the-Other) (also known as a bracketed buy order?)

I looks like the OCO part of both orders is mostly used to set a "Bracket", basically an upper and lower limit on sell orders at the same time.

I understand the lower limit, since you want to sell at a certain point to limit your losses.

But I don't understand why people set a sell limit on the higher side. Wouldn't you want to maximize profits as long as the stock is going up? And a trailing stop loss / limit order would help reduce losses on a stock that's going up but may trend down later?

Answer 1

Say the price of a stock you've been holding has been hovering between $10 and $13 with occasional spikes as high as $14.

If you think that pattern is going to repeat, you might want to sell the stock the next time it spikes to $14. Your expectation would be that it will probably quickly drop back down into the $13 range, so you want to capture that opportunity while you can.

Of course, while you're waiting for such a spike, the price might start dropping. So you might also want to sell at, say $9.50 because that would indicate that you were wrong about the pattern repeating and perhaps the stock price will drop much lower.