Sign UpWhat Is Isolated Margin and Cross Margin?
Intermediate
2024-08-20
In a perpetual contract, the full margin and the cross margin are the ways in which the user needs to pay the margin when opening or closing a position. Here are the explanations for full margin and cross margin for you to get a better understanding of these terms.
Isolated Margin
This refers to the user needing to pay the margin for all positions when opening or closing a position. This means that if the user has multiple different positions, they need to pay the margin for all positions when opening or closing. The advantage of this method is that the user can get lower leverage because they can open a position with less margin.
Cross Margin
This refers to the user only needing to pay the margin for each position when opening or closing a position. This means that if the user has multiple different positions, they only need to pay the margin for each position when opening or closing. The advantage of this method is that the user can get a higher leverage because they can open a position with less margin. However, this method also has risks because if the value of a position falls, the user may face the risk of having to add margin.
For example, a trader opens a BTC/USDT position. When the BTC/USDT position is liquidated, he will lose all of his USDT balance. However, the BTC balance will not be affected.
Differences between Isolated Margin & Cross Margin
Risk Management:
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Isolated Margin: Limits risk to the specific amount of margin allocated to a single position. If the position is liquidated, only the margin for that position is lost.
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Cross Margin: Spreads risk across your entire margin balance. If one position is at risk of liquidation, margin from other positions or your total balance can be used to prevent it.
Liquidation:
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Isolated Margin: Only the specific position with its allocated margin is liquidated if losses exceed the margin.
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Cross Margin: All positions share the margin. If your losses across positions are significant, multiple positions or the entire balance may be at risk of liquidation.
Flexibility:
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Isolated Margin: Less flexibility, as each position is independent and only uses its allocated margin.
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Cross Margin: More flexibility, as the margin is shared across positions, which can help in maintaining positions during market fluctuations.
Usage:
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Isolated Margin: Typically used by traders who want to strictly limit the risk of individual trades.
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Cross Margin: Often used by more experienced traders who want to optimize the use of their capital and maintain open positions longer.
Similarities between Isolated Margin & Cross Margin
Leverage
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Both isolated and cross margin allow traders to use leverage, meaning they can open larger positions than their actual capital would allow.
Margin Requirements:
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Both systems require the trader to maintain a certain margin level to keep positions open. If the margin level drops too low, liquidation can occur.
Trading Platforms:
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Most trading platforms that offer margin trading provide both isolated and cross margin options, allowing traders to choose based on their risk preference.
Closing Thoughts
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Isolated Margin: Limits loss to the margin allocated to one position.
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Cross Margin: Uses your total margin balance across all positions to prevent liquidation.
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