Reduce-Only Order

A reduce-only order is a derivatives order carrying a flag that lets it decrease an existing position and nothing else: if filling it would open a new position, increase the current one, or flip you from long to short, the venue cancels or trims the order instead. The flag exists because exit orders and entry orders look identical to a matching engine. A sell placed to close a long is the same instruction as a sell that opens a short, so anything that changes your position between placing and filling — a partial fill, an earlier stop firing, a liquidation — can turn a planned exit into an accidental new position in the opposite direction. Two failure modes account for most of the damage it prevents. The first is stacked exits: several take-profit and stop orders left resting against one position, where the first to fill leaves the rest oversized, and the survivors quietly open a fresh position after the original is gone. The second is the flip on a partial close, where a market order sized for a position that has already shrunk carries you through flat and out the other side. Most venues make reduce-only the default for stop-loss and take-profit orders on isolated positions; where it is optional, treat it as mandatory on every order whose only job is getting you out.