Isolated margin and cross margin in crypto trading

Photo - Isolated margin and cross margin in crypto trading
You can prevent losses and use your deposit more effectively by being aware of the nuances of margin trading.
In our previous article, we’ve already explained that margin refers to the minimum deposit a trader needs to open a leveraged trading position. Cross margin and isolated margin are supported by almost all centralized exchanges. Let's examine their differences and how to apply them in trading.

What is a Cross Margin?

A method called “Cross Margin” makes use of all available balances in a user's margin account to prevent liquidation. Your entire deposit acts as collateral. If adding margin is required, the exchange will automatically deduct the necessary sum from other positions or the margin account.

With a cross margin trading, the entire deposit is at risk. When a trader uses cross margin to hold several positions, if one of them is liquidated, the remaining positions will also be forcibly closed.

Cross margin advantages:

1. Cross margin can be used to cover unrealized losses with unrealized gains, minimizing the chance of liquidation.
2. Cross margin mode lowers the possibility of trades’ liquidation as the entire deposit is used to meet margin requirements.
3. Cross margin is useful for traders who want to hedge active positions.

Cross margin disadvantages:

1. The entire deposit is at risk; in the event of significant price fluctuations, the trader may lose all funds.
2. The trader has less control over specific positions.

Isolated margin is a better choice if controlling and keeping track of individual positions is your top priority.

What is an Isolated Margin?

Each trade in an isolated margin mode has a separate margin account, which keeps positions apart from one another. Each trade requires a deposit of a certain amount. If one trade requires additional margin, it will not be added automatically, even if funds are available on other trades or in the account. In this situation, you must manually add money.

The risk of each separate trade is limited to the amount allocated for isolated margin. If a trader uses isolated margin to open multiple trades, and one of them is closed, the others will remain open.

Isolated margin advantages:

1. The trader has better control over active trades, which is suitable for trading with high leverage.
2. The trader only puts one margin account at risk; the entire deposit is not at risk.
3. The isolated margin can be adjusted manually; if traders want to avoid liquidation, they can add the desired amount.

Isolated margin disadvantages:

1. If the margin placed into an isolated position falls below the required minimum level, the position will be liquidated even if you have funds in the general account.
2. An isolated margin trade carries a high risk of liquidation.

Cross Margin vs Isolated Margin: which is better?

These methods are suitable for different trading strategies.

Cross margin may be appropriate for swing traders who never put more than 1-2% of their deposit into a single position and frequently cover unrealized losses with unrealized profits. Cross margin is also better for beginners as it gives more flexibility and decision-making power.

Isolated margin is more frequently used for intraday trading with high leverage; this allows traders to effectively manage their positions and reduce possible losses in the event of high volatility.