A beginner’s guide to cross and isolated margins, including how to avoid losses!
Exchanges these days commonly offer leverage trading features, though the margin types may vary. The two most popular ones are cross and isolated margins.
Before we look at the many types of margins, let’s take a step back and discuss what margin is. For example, suppose Jack has $1000 in your own money as collateral for a leveraged position; this is known as margin. Leverage can be used to calculate a position size that is greater than that.
To put it another way, if you have any questions about trading futures on Binance, please read our thorough guide on the subject!
What Is Cross Margin?
The most popular margin mode among exchanges is known as cross margin. With this mode, your entire account balance is used to cover all open positions. The advantage of cross margin is that any realized or unrealized profit from one position can be applied to prop up another position that’s close to being liquidated.
While this type of margin is very straightforward and easy to use, it does not come without risk. Traders, who use cross margin, risk losing their entire account in case of liquidation. In the example used earlier, Jack would lose the entirety of his $1000. The only way to prevent liquidation is to add more money to the account.
What Is Isolated Margin?
With Isolated Margin, you set aside money only for the purpose of a trade. In the example below, you can see that before being able to conduct a trade, funds must be moved into the isolated margin account.
With this margining method, you can choose how much margin to allocate to a specific currency pair or position. This helps manage risk, as only the funds allocated to the position can be liquidated in worst-case scenarios.
Jack will choose how much of the $1,000 he wishes to allocate to a specific position by applying this rule. If Jack uses isolated margin, he may decide how much of the $1,000 should go to each position. For example, Jack longs for $1,250 in BTC but is only willing to lose $125 in the event of liquidation. As a result, Jack sets his isolated margin at 125 USD; if his position gets liquidated, he would lose no more than that amount.
If the position begins to lose value rapidly and is in danger of being sold off, Jack can still choose to add more money to it. I don’t recommend though pumping more money into a losing investment, but rather sticking to your original plan.
Which One Is Better?
I don’t think there’s necessarily a right or wrong answer to this. A lot of it depends on how you want to manage your risk. After all, a stop loss (whether on a cross margin or isolated margin position) protects you from losses exceeding a certain preset amount.
Simply said, liquidation can be avoided completely if proper risk management is implemented. Cross margin isn’t as hazardous as it appears because of this. Instead, it transforms into a powerful instrument that allows you to use P&L from the winning position to bail out a losing one. Isn’t it great?
Cross margin is more appealing if you want to partially hedge positions or take pair trades (for example, shorting Bitcoin while longing AVAX). Cross margin may be more beneficial if you take single transactions. I believe it’s a question of personal preference rather than dominance.
You may now choose which margin style is best for you after learning about the differences between cross and isolated margin. Please keep in mind the need to manage risk, especially when using leverage. As long as you remember to do this, both cross and isolated margin trading are excellent tools in your arsenal.
Remember, this article is based on my own experiences in trading, and it’s not financial advice. Do your research, try new things out and let’s make some money!