Reduce-only order

An order flagged so it can only shrink an existing position, never open a new one or flip it to the opposite side. If the order size exceeds what is left of the position, the exchange caps the fill instead.

Definition

A reduce-only order carries a restriction the exchange enforces at execution time: the fill may only make your position smaller. If the position has already closed, the order does nothing. If the order is larger than what remains, only the part that reduces the position executes.

The accident it prevents

Without the flag, an exit order is simply an order in the opposite direction. If the position is already gone, closed manually, closed by a stop, or liquidated, that order has nothing to close and opens a fresh position instead, pointing the way you were trying to get out of.

The failure is easy to miss because nothing errors. You believe you are flat, and you are actually holding the size you meant to sell, on the other side.

Where it becomes essential

Any time more than one exit order exists for the same position. Two take-profit levels, a take-profit alongside a stop-loss, or a manual close alongside a resting order: whichever one fires first leaves the others pointing at a position that no longer exists at that size.

The same applies to bots, where an order can be resubmitted from a stale view of the account.

What it does not do

Reduce-only limits direction and size. It does not limit price, does not guarantee a fill, and does not replace checking that a stop is actually in place. It is a safety catch on the order, not a strategy.

Where you will run into it

As a checkbox on the close-position dialog of most perpetual DEXs, usually enabled by default for take-profit and stop-loss orders, and as an explicit flag in exchange APIs.