- Isolated margin and cross margin are the two types of margin trading.
- Isolated margin involves assigning margin to a single position.
- Cross margin shares margin across different positions.
In cryptocurrency trading, margin trading allows traders to borrow funds to invest in cryptocurrencies. Traders bet on the price of a cryptocurrency going up or down. Then, it potentially amplifies both gains and losses for traders.
Many exchanges provide crypto traders funds to purchase assets they can’t afford on their own. Traders amplify their potential returns by using leverage.
Also, they need to maintain a certain margin level in their account to cover potential losses. If the margin level falls below a certain threshold, the exchange may issue a margin call, requiring the trader to add more funds to avoid liquidation.
Two primary types of margin trading are isolated margin and cross margin. This article will tell you the differences between these two margin trading options. It will help traders manage their risk more effectively.
About Isolated Margin
Isolated margin trading allows traders to allocate margin specifically to a position or trading pair. In this way, only the funds allocated to the position can be liquidated.
Isolated margin trading helps traders decide how much funds they want to allocate as collateral for a specific position. That particular trade does not impact the rest of your funds.
Pros And Cons Of Isolated Margin
Isolated margin trading is suitable for managing risk on individual trades without affecting other positions. Below, you can check both pros and cons of this leveraged trading strategy:
Pros Of Isolated Margin
- Isolated margin trading allows investors to calculate the profit and loss for an individual position. They can easily calculate the exact amount of funds tied to it.
- Crypto traders control how much funds they can allocate for a specific position. Only a specific amount is at risk in Isolated Margin trading.
This leveraged trading keeps the rest of the funds secure from potential losses in that particular trade.
- Traders can predict the maximum loss they can face in a worst-case scenario by segregating funds.
Cons Of Isolated Margin
- There is less flexibility in isolated margin trading. It restricts profits from one position to cover losses in another. Also, this margin trading leads to more frequent liquidations.
- A trader needs to monitor the trade to avoid liquidation closely.
- Handling multiple isolated margin trades is complex, especially for active traders.
About Cross Margin
The cross-margin strategy uses the entire account balance as collateral for all open positions. If one position moves against you, but another is in profit, the profit can be used to cover the loss.
However, cross-margin trading keeps the entire account at risk. Also, it allows traders to have larger positions with less capital.
Pros And Cons Of Cross Margin
Cross-margin trading offers greater capital efficiency but comes with higher risks. Below, you can check both pros and cons of this leveraged trading strategy:
Pros Of Cross Margin
- Cross-margin provides greater flexibility in margin allocation. It uses the available balance in the account to avoid liquidation of any open position. Cross margin is helpful for hedging strategies.
- This margin trading provides easier management for multiple trades. It simplifies the process as traders don’t have to adjust the margin of each trade individually.
- Cross-margin spreads risk across multiple positions. Also, it reduces the likelihood of sudden liquidation due to the performance of a single position.
Cons Of Cross Margin
- There is a higher risk of total liquidation in cross-margin trading. It includes the entire account balance at risk. A significant loss in one position can affect your whole account, potentially leading to liquidation.
- It is not easy for all traders to allocate a specific risk-reward ratio to individual trades compared to isolated trading.
- Cross-margin trading is challenging as it requires continuous monitoring of all positions to avoid unexpected losses.
Top Differences Between Isolated Margin And Cross Margin
Below, you can check how isolated margin trading is different from cross-margin trading:
- Funds Allocation
Isolated margin allocates a specific portion of funds for a particular trade. Traders have greater control over individual positions. On the other hand, all the funds in your account serve as collateral for your cross-margin trades. This margin trading increases overall exposure to market risks.
- Suitability
Isolated margin is suitable for beginners who prefer to limit their risk exposure on individual trades. On the other hand, experienced traders can handle higher risks and manage multiple positions simultaneously in cross-trading.
- Risk Management
Isolated margin confines the risk to a specific position. If the position is liquidated, only the funds allocated to that position are lost. However, cross-margin combines the risk across all of your open positions. The combined risk can mean potentially higher losses.
- Flexibility
Isolated margin allows traders to manage each position independently. It is beneficial in volatile markets. Then, cross-margin offers higher flexibility for experienced traders managing multiple positions. It pools all profits and losses into one account.
Disclaimer
This article is for informational purposes only. Crypto investment involves inherent risks due to the volatility in price. Readers should conduct their own research before making any investment decision. Also, you can consult a crypto expert before investing in cryptocurrencies.