In two minutes, understand the difference between isolated margin and cross margin!
Many newcomers are still unaware of the differences and basic concepts between isolated margin and cross margin. Today, let's discuss what isolated margin and cross margin are!
1. Isolated Margin Mode
The margin required when opening a position will serve as the fixed margin for the contract position.
In the isolated margin mode, positions can be held in both directions, with short and long positions calculated independently in terms of risk. The margin and profit for each contract's two-way positions will be calculated independently.
Advantages of Isolated Margin Mode: Liquidation will only result in the loss of the position's margin, meaning the amount of position margin is the maximum loss. Only the margin amount of the position in that direction will be lost, without affecting other funds in that contract account.
2. Cross Margin Mode
All balances transferred into the contract account will serve as the margin for the contract position, with all profits and losses from contracts combined as the position margin. When using the cross margin mode, the risk and profit of all positions in the account will be calculated together, and liquidation will only occur when the position loss exceeds the account balance.
Advantages of Cross Margin Mode: The account can withstand losses better, making it easier to operate and calculate positions, thus it is often used for hedging and quantitative trading.
3. Comparison of the Two
Cross Margin Mode: It is relatively less likely to be liquidated in low leverage and volatile markets, but when facing significant market movements or uncontrollable factors that prevent trading, it can very likely lead to the account's total funds becoming zero.
Isolated Margin Mode: It is more flexible than cross margin mode, but there is a need to strictly control the distance between the liquidation price and the mark price; otherwise, a single position can easily get liquidated, causing losses.
Example:
A and B both use 2000 USDT, with 10x leverage to long BTC/USDT contracts.
A uses isolated margin mode, occupying 1000 USDT as margin, while B uses cross margin mode.
Assuming A's liquidation price is at 8000 USDT, and B's liquidation price is at 7000 USDT.
If BTC suddenly drops to 8000 USDT, A's account will lose 1000 USDT margin and get liquidated, losing 1000 USDT, leaving 1000 USDT remaining.
On the other hand, B using cross margin mode will lose 1000 USDT, but the long position will still be open.
If the price rebounds at this point, B may turn losses into profits; however, if the price continues to drop, they might lose all 200.
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