Two minutes to help you understand the difference between isolated margin and cross margin!

Many newcomers to the space are still unaware of the distinctions and basic concepts between isolated 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 be used as the fixed margin for the contract's position.

When using the isolated margin mode, positions can be held in both directions, with the risks of short and long positions calculated independently. The margin and profits of each contract's dual positions will be calculated independently.

Advantages of Isolated Margin Mode: Liquidation will only result in the loss of the position's margin, meaning that the amount of position margin is the maximum loss. Only the margin amount of the position in that direction will be lost, and it will not affect other funds in the contract account.

2. Cross Margin Mode

All balances transferred to the contract account, as well as all profits and losses generated by contracts, will be used as the position margin for the contract. When using the cross margin mode, the risks and profits of all positions in the account will be calculated together. A liquidation will only occur when the losses exceed the account balance.

Advantages of Cross Margin Mode: The account has a stronger capacity to bear losses, making it easier to operate and calculate positions, hence it is often used for hedging and quantitative trading.

3. Comparison of Both

Cross Margin Mode: Under low leverage and volatile market conditions, it is relatively difficult to be liquidated. However, in the event of significant market movements or uncontrollable factors that prevent trading, it is very likely that all funds in the account could be wiped out.

Isolated Margin Mode: Is more flexible than cross margin mode, but requires strict control over the distance between the liquidation price and the marking price. Otherwise, a single position can easily be liquidated, resulting in losses.

Example:

A and B both use 2000 USDT, with 10x leverage to go long on BTC/USDT contracts.

A uses isolated margin mode, occupying 1000 USDT margin, while B uses cross margin mode.

Assuming A's liquidation price is at 8000 USDT, and B's liquidation price is 7000 USDT.

If BTC suddenly drops to 8000 USDT, A's account will lose 1000 USDT margin and be forcibly liquidated, resulting in a loss of 1000 USDT, leaving 1000 USDT remaining.

On the other hand, B using cross margin mode will lose 1000 USDT, but the long position remains.

At this point, if the price rebounds, B may turn the loss into a profit, but if the price continues to drop, they may lose all 2000 USDT.