Cross vs. Isolated Margin
Last updated
Last updated
Nowadays, numerous exchanges provide leverage trading options in various forms. A key distinction is the type of margins employed by these exchanges, with cross and isolated margins being the most common.
Before diving into the different margin types, let's quickly review what margin is. Suppose Jack uses $1000 of his own money as collateral for a leveraged position; this is known as margin. With leverage, the position size can be greater than the margin itself.
Cross margin is the most widely-used margin mode across exchanges. In this mode, your entire account balance serves as collateral for all open positions. One advantage of cross margin is that the profit and loss (P&L) from one position can be used to support another position nearing liquidation. This can also apply to unrealized P&L, depending on the platform.
Although cross margin is simple and convenient, it carries risks. Traders using cross margin may lose their entire account balance in the event of liquidation. In the previous example, Jack would lose his entire $1000. The only way to avoid liquidation is by adding more funds to the account.
With Isolated Margin mode, you assign margin to a specific position or trading pair. As shown in the screenshot below, the platform requires you to transfer funds into the isolated margin before trading.
This margin mode enables you to control risk for a particular pair or position by selecting the amount of margin allocated to it. In worst-case scenarios, this approach is beneficial since only the funds assigned to the position can be liquidated.
There isn't a clear-cut answer to this question. Your choice between the two largely depends on your risk management approach. Remember that a stop loss, whether applied to a cross margin or isolated margin position, can still limit a position's losses to a pre-determined amount.
In simpler terms, with appropriate risk management, liquidation can be entirely avoided, making cross margin not as risky as it might seem. Instead, it becomes a valuable tool that enables you to use the P&L from a winning position to salvage a losing one – quite advantageous, isn't it?
Cross margin might be more appealing if you prefer to partially hedge positions or engage in pair trades (e.g., shorting Bitcoin while longing AVAX). If you primarily take single trades, you might lean towards using isolated margin. Ultimately, it's more about personal preference than one being superior to the other.
Having learned the distinctions between cross and isolated margin, you can now determine which one suits you best. Remember, risk management is crucial, particularly when trading with leverage. As long as you manage risk effectively, both cross and isolated margin trading can be valuable tools in your trading arsenal.
