What is a Reduce Only order?

Main purpose for trading

The main purpose of a Reduce Only order in trading is to manage and control risk by ensuring that a trader's position size decreases rather than increases.

Here are the key purposes of Reduce Only orders:

1. Risk Management: Reduce Only orders help traders limit their exposure to the market by allowing them to close out or reduce their positions without inadvertently increasing their exposure. This is particularly useful for traders who want to reduce their risk in volatile or uncertain market conditions.

2. Position Control: Traders can use Reduce Only orders to control the size of their positions, ensuring that they only decrease in size rather than grow larger. This can be important for maintaining a balanced portfolio and adhering to risk management strategies.

3. Trade Execution Strategy: Reduce Only orders can form part of a trader's overall trade execution strategy, allowing them to selectively close out positions while keeping other positions open. This flexibility can help traders optimize their trading decisions and adapt to changing market conditions.

For example:
Trader A currently holds Buy Long 1,000 BTCUSD contracts at USD 5,000 and also sets a stop loss order at USD 4,800. In addition, Trader A also wants to set a take profit/partial take profit order with a limit price set at USD 5200. The following are 2 examples of Trader A setting a Take Profit with and without selecting the Reduce-only order option:

• Without Reduce-only Option

If the Last Traded Price triggers the order's stop-loss first and then proceeded to rise back to USD 5,200, the previous take profit limit order will likely be fulfilled, causing the trader to open an unintended Sell position at USD 5200.

• With Reduce-only Option

If the Last Traded Price triggers the order's stop-loss first, the corresponding take profit limit order at USD 5200 will automatically be cancelled, thereby ensuring its non-execution to prevent future unintended opening of positions.
 

Please take note:

1) If there's no open position, regardless of any other active orders, the system will automatically decline any attempts to place reduce-only orders.

2) The "close by limit/market price" feature within the Position tab inherently includes the Reduce-only functionality as the default with priority in execution. If there's insufficient margin, active orders with the highest order price (in the same trading direction) as the close-by function will be canceled initially to free up margin for execution.

3) When holding an existing position without any other active orders, a reduce-only order can only be placed for a quantity less than or equal to the existing open position's contract size. Any reduce-only orders exceeding the existing position's contract size will be automatically adjusted or canceled.