What is a 'reduce-only' order and when should you use it?

Understanding Reduce-Only Orders

1. A reduce-only order is a type of conditional trade instruction that prevents the opening of new positions. It only permits execution if the resulting action decreases the size of an existing position.

2. This mechanism ensures that no additional exposure is added to the account, even if market conditions shift unexpectedly before order execution.

3. Exchanges enforce this rule at the matching engine level — if the order would increase net position size, it is automatically rejected or canceled.

4. The feature applies to both long and short positions, meaning a reduce-only buy can close part of a short, while a reduce-only sell can close part of a long.

5. Unlike regular limit or market orders, reduce-only orders do not interact with the order book in ways that could initiate new directional bets — their sole function is risk mitigation.

How Reduce-Only Orders Interact With Leverage

1. In leveraged trading environments, especially on perpetual swap platforms, position size directly affects margin utilization and liquidation thresholds.

2. When a trader holds a 20x long position and initiates a reduce-only sell, the system verifies that the order quantity does not exceed the current long balance before submission.

3. If leverage is adjusted mid-trade, reduce-only logic recalculates based on real-time position data, not initial entry parameters.

4. Some platforms display active position size alongside the reduce-only toggle, helping users avoid misconfiguration.

5. Margin calls often trigger automatic reduce-only liquidations — these are executed by the exchange’s risk engine without user intervention when equity falls below maintenance levels.

Common Scenarios for Reduce-Only Usage

1. Traders setting profit targets on large positions use reduce-only limit orders to lock in gains without risking accidental reversal of direction.

2. During high-volatility events like major protocol upgrades or macroeconomic announcements, reduce-only stop-market orders help exit exposure rapidly without amplifying losses.

3. Arbitrageurs deploying cross-exchange strategies rely on reduce-only instructions to prevent unintended inventory buildup when one leg executes but the other lags.

4. Portfolio managers rebalancing multi-asset crypto positions apply reduce-only orders to trim allocations without triggering taxable events from new entries.

5. Users managing multiple sub-accounts under a master wallet use reduce-only constraints to enforce strict separation of position lifecycle management across teams or strategies.

Exchange-Specific Implementation Differences

1. Binance Futures enforces reduce-only at the order placement stage — any attempt to submit a reduce-only order that would open a position results in immediate rejection with error code “ReduceOnlyOrderWouldOpenPosition”.

2. Bybit allows reduce-only orders to be attached to conditional triggers like trailing stops, but requires explicit confirmation that the linked order respects position reduction rules.

3. OKX applies reduce-only logic per contract symbol and margin mode, meaning isolated and cross-margin accounts handle the constraint independently even within the same account.

4. Deribit uses reduce-only primarily in options delta hedging workflows, where gamma exposure must be actively reduced without altering vega or theta profiles.

5. Kraken Futures displays real-time position impact previews before order submission, highlighting whether a reduce-only instruction would result in full or partial closure.

Frequently Asked Questions

Q: Can a reduce-only order execute partially?Yes. If only part of the specified quantity can reduce the position — for example, due to partial fills or concurrent position changes — the executed portion reduces exposure while the remainder remains unfilled or cancels depending on time-in-force settings.

Q: Does reduce-only affect slippage tolerance?No. Slippage controls operate independently. A reduce-only limit order still adheres to its price limit; a reduce-only market order still accepts prevailing liquidity — the constraint only governs directionality and position sizing.

Q: Is reduce-only available for spot margin trades?Generally no. Reduce-only is a derivatives-specific feature tied to open position tracking. Spot margin involves loan balances and asset holdings, not directional contracts with net position states.

Q: What happens if my position is closed by another event before the reduce-only order triggers?The order becomes invalid. Most exchanges auto-cancel reduce-only orders when the referenced position reaches zero, preventing accidental execution against non-existent exposure.