What is the difference between cross and isolated margin?

Cross Margin: How It Works in Crypto Trading

1. Cross margin uses the entire balance of a trader’s account as collateral for all open positions. This means that every asset held in the account contributes to maintaining margin requirements across all trades.

2. When liquidation risk increases on one position, the system automatically allocates available funds from other assets to prevent a margin call. This provides a buffer that can help sustain leveraged positions during volatile market swings.

3. Traders benefit from increased flexibility, especially when managing multiple positions simultaneously. The shared pool of funds reduces the likelihood of isolated position liquidations due to temporary price dips.

4. However, the interconnected nature of cross margin introduces systemic risk. A sharp downturn in one highly leveraged trade can deplete the entire account balance, affecting all other positions regardless of their individual performance.

5. This model is best suited for experienced traders who maintain a diversified portfolio and closely monitor overall account health. It demands constant attention to net equity and margin utilization across all open trades.

Isolated Margin: Precision and Control

1. Isolated margin assigns a fixed amount of collateral to a specific trading position. Only the designated funds are at risk, and losses are capped at that amount even if the market moves drastically against the trade.

2. Traders have full control over leverage levels and margin allocation per position. This allows for strategic risk management, particularly when experimenting with high-leverage setups on volatile assets.

3. If a position reaches its liquidation price, only the allocated margin is lost. Other positions and the rest of the account balance remain untouched, preserving capital for future opportunities.

4. The downside is reduced flexibility. Without automatic access to additional funds, a position may be liquidated prematurely during short-term volatility, even if the overall account has sufficient equity to sustain it.

5. This mode appeals to traders who prioritize risk containment and prefer to isolate exposure. It supports disciplined trading by enforcing predefined limits on capital allocation.

Key Differences in Risk and Flexibility

1. Cross margin spreads risk across the entire account, while isolated margin confines it to individual positions. This distinction shapes how traders approach leverage and position sizing.

2. In cross margin, a single losing trade can trigger a cascade effect, potentially wiping out the entire balance. Isolated margin prevents this by ring-fencing each trade’s financial impact.

3. Cross margin adapts dynamically to market conditions, using available equity to support struggling positions. Isolated margin remains rigid, requiring manual intervention to adjust collateral or leverage.

4. Traders using isolated margin must actively manage stop-losses and margin levels. Cross margin systems handle some of this automatically, though at the cost of broader exposure.

5. The choice between models often reflects a trader’s risk appetite. Aggressive strategies may favor cross margin for its resilience, while conservative approaches lean toward isolation for its predictability.

Frequently Asked Questions

Can I switch between cross and isolated margin during an active trade?Most exchanges do not allow switching modes once a position is open. The margin type must be selected before entering the trade and remains fixed until closure.

Does isolated margin support higher leverage than cross margin?Leverage limits depend on the exchange and asset pair, not the margin mode. However, isolated margin allows precise control over leverage per position, enabling traders to apply maximum allowable leverage selectively.

What happens to unrealized profits in isolated margin when a position is liquidated?Unrealized gains are forfeited upon liquidation. Only the initial margin is considered at risk, and any accrued profits vanish if the price hits the liquidation threshold before closing the position manually.

Are funding fees calculated differently between the two margin types?Funding fees are determined by the perpetual contract mechanism and are independent of margin mode. Both cross and isolated margin positions incur the same funding rates based on time held and contract terms.