Traders can select the reduce-only option when placing an order if they have an open position.
Submitting Reduce-Only Orders
As the name suggests, reduce-only orders can only reduce the size of an existing position. For example, if you hold a long position for BTC, you'll only be able to select the reduce-only option when opening a limit order to sell. You can also choose the percentage of the position you want to reduce (0% to 100%).
If the reduce-only option is used as part of a stop-loss order, it will be triggered by the index price. However, a reduce-only limit order is triggered by the mark price.
So for a limit order, once the mark price crosses the limit price specified in the reduce-only order, your position will be reduced by the amount specified. For example, if you want to close half of your position, you can select close 50% when submitting the reduce-only order.
Once a reduce-only order has been submitted, it will appear in the orders tab and displays "Yes" under the reduce only column.
Why Use Reduce-Only Orders?
To understand why reduce-only option is needed, imagine you set two limit orders to lock in profits or losses for an open position. Assume that for both of these orders the reduce-only option is not selected.
If the price hits the limit order that's acting as a stop loss, it will reduce your position and lock in losses, however, if there's high volatility, then the other limit order may be triggered, forcing you into an unintended position. Since the initial position was already closed and since the reduce-only option was not specified, then the remaining limit order will be executed regardless of whether the original position remains open or has already been closed.
If you increase an existing position, you'll also have to add another reduce-only order to match the size of the position if you want to fully close it out.