In two minutes, let’s understand the difference between isolated margin and cross margin! Many partners who have just entered the market may not know the difference and basic concepts between isolated margin and cross margin. Today, we will talk about what isolated margin and cross margin are!
1. Isolated Margin Mode
The margin required to open a position will serve as the fixed margin for the contract.
When using the isolated margin mode, you can hold positions in both directions, and the risk of short positions and long positions is calculated independently. The margin and profits of each contract's 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 margin for that position is the maximum loss. You will only lose the margin amount for that direction's position, and it will not affect other funds in the contract account.
2. Cross Margin Mode
All balances transferred into the contract account will serve as the margin for the contract positions. When using the cross margin mode, the risks and profits of all positions in the account will be calculated together, and liquidation will only occur when the losses exceed the account balance.
Advantages of Cross Margin Mode: The account has a stronger ability to bear losses, making it easier to operate and calculate positions, which is why it is often used for hedging and quantitative trading.
3. Comparison of the Two
Cross Margin Mode: It is relatively less prone to liquidation in low leverage and volatile markets, but in the event of major market movements or some uncontrollable factors that prevent trading, it can lead to the entire account balance going to zero.
Isolated Margin Mode: It is more flexible than cross margin mode, but it requires strict control over the distance between the liquidation price and the mark price; otherwise, a single position can easily be 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 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 loses 1000 USDT margin and is forcibly liquidated, resulting in a loss of 1000 USDT, with a remaining balance of 1000 USDT.
On the other hand, B, using cross margin mode, after losing 1000 USDT, still holds the long position.
If the price rebounds at this point, B may turn the loss into a profit, but if the price continues to drop, B may lose the entire 2000 USDT.
