What is Cross Margin & Isolated Margin
Users can choose between "Cross Margin" and "Isolated Margin" when trading perps on exchanges like Binance, OKX, and Bybit. These two modes differ regarding position independence, risk control, and applicable scenarios.
Cross Margin refers to using all the funds in an account as margin to support multiple positions. In this trading mode, regardless of the number of positions held, all the funds in the account are shared among these positions.
Suppose one of your positions in a cross margin mode incurs a loss and is at risk of being liquidated. However, due to the cross margin mode, the funds in your account that are not used as margin and the realized profits from other positions (some exchanges allow this) will be used to offset the loss and prevent the position from being liquidated. This is the advantage of cross margin, as it can protect your positions from liquidation in certain situations.
What is liquidation? Please refer to the "What is Liquidation?" chapter.
However, suppose a position experiences significant losses that deplete all the funds in the account, but the margin balance is still insufficient. In that case, it will trigger forced liquidation, resulting in the liquidation of all positions.
Therefore, the cross margin mode is more suitable for long-term holding and maintaining positions during short-term volatility. It is particularly suitable for assets with relatively low volatility and higher liquidity.
In contrast to cross margin, isolated margin allows you to allocate funds to different independent positions. This means you can diversify your investments across multiple positions, and each position operates independently without affecting each other.
The advantage of isolated margin is that even if one position incurs losses and gets liquidated, the funds in other positions and your account will not be affected. Based on this feature, isolated margin provides better risk control as you can limit the margin amount for each position, thereby reducing overall risk.
Suppose you have 500 USDT in both your cross margin and isolated margin accounts, and you open long positions for BTC and ETH with 200 USDT each in both accounts. The remaining 100 USDT is kept as reserve funds in each respective account.
If both the prices of BTC and ETH are rising, both of your accounts will generate profits. However, if the price of BTC increases while the price of ETH declines, it will have different effects on the two accounts:
In the isolated margin account, when the price of ETH drops, it will consume that position's margin (200 USDT). The position will be forcefully liquidated if the margin is depleted and you don't replenish it in time. However, your account's BTC position and the remaining 100 USDT will remain unaffected.
In the cross margin account, when ETH falls to the liquidation price, it doesn't trigger immediate liquidation. Even if you choose not to replenish the margin, the system will automatically use the remaining funds in your cross margin account and the realized profits from the BTC position to maintain the ETH position. However, if ETH continues to decline or even reaches zero, your BTC position will also be forcefully liquidated, and there won't be any remaining funds in the account.
Therefore, during price declines, the isolated margin account can potentially make you lose the entire margin of that position, up to a maximum loss of 100% of the initial margin.
On the other hand, the cross margin account can expose you to losses beyond the initial margin. Although the risk of liquidation is smaller, it triggers larger losses when liquidation occurs.
Different exchanges may have different rules and mechanisms for handling liquidation in cross margin mode. In some exchanges, when one position triggers liquidation, the exchange automatically closes all positions. This means that even if other positions are profitable, they will still be forcibly liquidated. However, in some exchanges, when one position triggers liquidation, that position is liquidated, but other positions can remain open. Additionally, some exchanges like Binance and BitMEX allow you to use the realized profits from other positions as margin to maintain the positions you hold.
In summary, when choosing an exchange and engaging in cross margin or isolated margin trading, it is crucial to carefully read and understand the rules and policies of the exchange and ensure compliance with appropriate risk management strategies to protect the safety of your funds.
- Margin is used to support multiple positions.
- The liquidation risk is relatively smaller, but it's possible to lose all funds in extreme market conditions.
- Margin is used to support a single position.
- Liquidation of a single position does not affect the account's other holdings or remaining funds.
What else do you want to learn?