Reduce-only is an order flag that ensures that the size of an open position is reduced, otherwise the contract quantity is adjusted to match the size of the open position. The reduce-only flag can be combined with any type of order.
For all limit orders, select 'Reduce-Only' from the Order Flags dropdown menu (or tick the Reduce-Only box for market/stop loss/take profit orders):
Currently, the time in force for reduce-only orders is Immediate or Cancel. This means that if the quantity is not available in the order book at time of execution, then the order is cancelled.
If two reduce-only orders are placed one after the other, the quantities are adjusted so that the number of all reduce-only orders executed is never higher than the amount of contracts in an open position.
Examples
The two main uses of reduce-only order flags are: i) setting a stop loss, and ii) setting a take profit/take limit order.
1. Setting a Stop Loss
The reduce-only option can be used with stop orders before entering a position to act as a stop loss and limit the risk.
For example, a stop loss (or stop limit) order to buy with the reduce-only flag acts as a stop loss for a short position. A stop sell order with the reduce-only option can be used as a stop loss for a long position.
Before you enter a short position, let’s say 11,000 BTC-PERP contracts at a price of $9,240, the stop loss order to buy at a slightly higher price of $9,260 ensures that the risk of the trade is defined beforehand.
The stop order using the reduce-only option at $9,260 is only active if the position remains open. So even if the sell order is not filled, you will not end up long when the price reaches the trigger price of the reduce-only stop order.
Even if the price reaches $9,260 before you enter a short position, the stop buy order will not be executed.
If the short position is closed before the reduce-only order is filled, it is cancelled once the trigger price is reached, and the unfilled order notification will appear. Since there is no position to reduce, the order is not executed and is cancelled.
If another buy stop order is placed with the reduce-only option at a lower price, say $9,255, then that order will be executed first and the other reduce-only order at $9,260 will be cancelled. For example, if both stop orders have a quantity of 11,000 contracts, once the first stop is executed, the other is cancelled.
However, if the stop order at $9,255 has a quantity of 5,000 contracts while the stop order at $9,260 has a quantity of 11,000 contracts, the position is reduced to 6,000 contracts once the stop at $9,555 is triggered. The stop at $9,260 will be adjusted downward from 11,000 to 6,000 contracts once executed, ensuring that the position is closed out without the trader ending up in a long position.
The quantity of the buy stop order must be adjusted if the size of the short position is increased to ensure that the stop loss exits the entire position.
For example, if you increase the position to 15,000 contracts, then you will have to adjust the quantity of the reduce-only order to 15,000 contracts as well (shown above). If the reduce-only order is not adjusted, then on execution, the short position will remain partially open.
Setting a Take Profit/Take Limit Order
The reduce-only option can also be used with take profit/take limit orders before you enter a position to act as a take profit level.
Before entering a position, a reduce-only take profit/take limit order defines the reward of the position before it is opened. For example, a take profit order to buy with the reduce-only flag can be used if you are in a short position to ensure that the position is closed for a profit when the price reaches a certain level.
Once the mark price hits the trigger price, the position will be reduced by the quantity of contracts specified with the reduce-only take profit order to buy.
The reduce-only flag can also be used with a take profit/take limit order to sell and close a long position in profit.
Before you enter a long position, let’s say 10,000 BTC-PERP contracts at a price of $10,350, the take profit order to sell 10,000 BTC-PERP contracts at a higher price of $10,500 ensures that the reward of the trade is defined beforehand.
The take profit order using the reduce-only option at $10,500 is only active if the long position remains open and ensures you will not end up short when the price reaches the trigger price of the reduce-only take profit order.
If the long position is closed before the reduce-only order is filled, it is cancelled once the trigger price is reached, and the unfilled order notification will appear. Since there is no position to reduce, the order is not executed and is cancelled.
If another take profit sell order with quantity of 10,000 is placed with the reduce-only option at a lower price, say $10,450, then that order will be executed first and the other reduce-only order at $10,500 will be cancelled. However, if the take profit sell order at $10,450 is executed with a quantity of 5,000, the other take profit order with the reduce-only flag will be adjusted from 10,000 to 5,000 once the mark price reaches the trigger price of $10,500. This ensures the trader does not unintentionally open a short position after the first take profit order is executed.
The quantity of the take profit/take limit order must be adjusted if the size of a position is increased to ensure that the take profit/take limit order exits the entire position.