In two minutes, understand the difference between isolated margin and cross margin! Many newcomers are still unaware of the distinction 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 to open a position will be treated as the fixed margin for that contract's position.
In isolated margin mode, you can hold positions in both directions, with the risk of short positions and long positions calculated independently. Each contract's dual positions will independently calculate their margin and profit.
Advantages of Isolated Margin Mode: Liquidation will only result in the loss of the position's margin, meaning that the amount of the position's margin is the maximum loss. You will only lose the margin amount of the position in that direction, which will not affect the other funds in that contract account.
2. Cross Margin Mode
All balances transferred to the contract account will serve as the margin for the contract's positions. In cross margin mode, the risk and profit of all positions in the account will be calculated together. Liquidation will occur only when the losses exceed the account balance.
Advantages of Cross Margin Mode: The account has a stronger capacity to withstand losses, making it easier to operate and calculate positions, hence it is commonly used for hedging and quantitative trading.
3. Comparison of the Two
Cross Margin Mode: It is relatively less likely to be liquidated under low leverage and volatile market conditions, but it can lead to the total loss of all funds in the account when encountering significant market movements or uncontrollable factors that prevent trading.
Isolated Margin Mode: It is more flexible than cross margin mode, but it requires strict control of the distance between the liquidation price and the marked price; otherwise, a single position can easily lead to liquidation and losses.
Example:
A and B both use 2000 USDT with 10x leverage to go long on the BTC/USDT contract.
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, be forcibly liquidated, incur a loss of 1000 USDT, and have 1000 USDT remaining.
Meanwhile, B, using cross margin mode, will incur a loss of 1000 USDT but still holds the long position. If the price rebounds, B may recover losses; however, if the price continues to drop, B could potentially lose the entire 2000 USDT.