Two minutes to 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 talk about what isolated margin and cross margin are!

1. Isolated Margin Mode

The margin required to open a position will be fixed as the position margin for the contract.

When using the isolated margin mode, you can hold positions in both directions, with short and long positions calculated independently for risk. The margin and profit for each contract's positions will be calculated independently.

Advantages of Isolated Margin Mode: Liquidation will only result in the loss of the position margin, meaning that the amount of position margin is the maximum loss. You will only lose the margin amount of the position in that direction, which will not affect other funds in the contract account.

2. Cross Margin Mode

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

Advantages of Cross Margin Mode: The account has a stronger capacity to absorb losses, 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 get liquidated in low leverage and volatile markets, but when facing significant market movements or uncontrollable factors that prevent trading, it is very likely to result in the entire account balance going to zero.

Isolated Margin Mode: More flexible than cross margin mode, but requires strict control over the distance between the liquidation price and the mark price; otherwise, a single position can easily get liquidated and incur 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 at 7000 USDT.

If BTC suddenly drops to 8000 USDT, A's account will incur a loss of 1000 USDT margin, getting forcibly liquidated, losing 1000 USDT, with 1000 USDT remaining.

On the other hand, B, using cross margin mode, incurs a loss of 1000 USDT, but the long position remains.

If the price rebounds at this point, B might turn the loss into profit, but if the price continues to drop, they could potentially lose the entire 2000 USDT.