A must-read for newbies to perpetual contracts: What are isolated margin and cross margin? Advantages, Disadvantages and Differences in Margin Management

Isolated margin and cross margin are two margin management modes that users often need to set when trading cryptocurrency perpetual contracts.

These two models have essential differences in capital leverage and margin requirements, which directly affect traders’ strategy choices and risk tolerance. Therefore, different types of positions also represent different trading strategies. The following will analyze the isolated margin and margin requirements. Analyze how to choose based on the differences between cross margin.

What is the isolated margin mode?

In the isolated margin mode, traders can set margins for each position separately, which allows each transaction in the isolated margin mode to have its own independent margin and be isolated from other transactions. The advantage of this method is that it can reduce the risk of cross-profit and loss: a loss in one transaction will only affect the margin of that transaction and will not affect other transactions in the account.

For example, the total margin you have is 1,000 USDT, and you choose to use isolated margin position to open a 10x leveraged position of 1,000 USDT. At this time, your margin is 100 USDT. Even if the position is liquidated in the end, your loss will be only It’s only 100 USDT and will not have any impact on other transactions.

What is the cross margin model?

The cross margin model is the opposite, and all the trader's margin will be used to maintain the position.

The feature of cross margin is that all available balances in the trader's account are used to prevent positions from being forced to be liquidated. It has a higher tolerance when looking in the wrong direction, but it also means that when the loss exceeds the upper limit, all margins may be cleared.

For example, the total margin you have is 1,000 USDT, and you choose to use isolated margin to open a 10x leveraged position of 1,000 USDT. At this time, your margin is all your margin 1,000 USDT. If today’s market conditions are not favorable to traders, On the downside, the loss may be the entire deposit.

Quick comparison between isolated margin and cross margin

The main difference between cross margin isolated margin is:

• Risk distribution: The isolated margin mode spreads risks to various positions, while the cross margin mode gathers all funds to jointly resist risks.
• Margin requirements: In the isolated margin model, each transaction needs to calculate and maintain margin independently, while in the cross margin model, all margins in the account are shared.
• Potential Gains and Losses: The cross margin model may lead to higher returns when predicting the market correctly, but it may also lead to greater losses.
• Operational complexity: Isolated margin positions require traders to manage the margin of each transaction, which may increase the complexity of the operation. The cross margin model is relatively simple, but requires more attention in risk management.

Advantages and Disadvantages of Isolated Margin

The isolated margin model is a risk diversification strategy that allows traders to allocate margin to each position individually, so that the profit and loss of each transaction can be calculated independently. The following is an analysis of the advantages and disadvantages of the isolated margin model:

advantage:

1. Risk control: The isolated margin mode allows traders to limit the loss of each transaction. When one or several transactions lose money, it will not affect other funds in the account.
2. Diversification: This model facilitates diversification because each transaction is independent and the entire account will not be implicated due to a single investment mistake.
3. High transparency: The profit and loss of each transaction are clear, which is beneficial for strategy evaluation and adjustment.

shortcoming:

1. Low capital utilization: Since margins are managed separately, this may result in the capital utilization not being as high as the cross margin model.
2. Complex management: The margin and profit and loss of each transaction need to be managed independently, which may appear relatively complicated for novices or traders who do not want to spend too much time on fund management.
3. Potential profit limitation: Compared with the cross margin mode, the potential profit of the isolated margin mode may be lower due to the limitation of margin allocation.

Advantages and disadvantages of cross margin

Cross margin mode is a margin allocation method offered by many cryptocurrency trading platforms that allows traders to combine all margins to support all positions opened. Here are the main pros and cons of the cross margin model:

advantage:

1. High capital utilization efficiency: Under the cross margin mode, traders can use all margins for any position, which can make the use of funds more flexible and efficient.
2. Easy to operate: Compared with the isolated margin mode, the management of the cross margin mode is simpler and more direct, and there is no need to allocate and manage margin for each position.

shortcoming:

1. Higher risk: When using the cross margin mode, the profits and losses of all positions will affect the entire margin of the account, so if the market goes against the trader, the margin may be quickly exhausted and the risk of forced liquidation increases.
2. Concentrated risk: Since all margins are shared, once a loss occurs, it will affect all funds in the account. This concentrated risk may be detrimental to traders.
3. Management difficulty: For traders who need sophisticated risk management, the cross margin model may not be easy to accurately control the profit and loss ratio of each transaction.

How to choose between isolated margin and cross margin in contract trading?

Since the isolated margin and cross margin models each have their own advantages and disadvantages, the following is an example of suggestions for users to choose the timing of isolated margin and cross margin:

1. Position opening options to assess market volatility:
   • In highly volatile markets, the isolated margin model can reduce the risk of large-scale losses caused by market emergencies.
2. Want to clearly allocate funds:
   • When you want to allocate funds clearly, you can use the isolated margin mode to determine the margin amount for each position, so that even if one position is forced to be closed, it will not affect other positions.
3. Choose decentralized trading:
   • Users who want to diversify their investments can use the isolated margin mode to achieve targeted trading strategies, such as diversifying investments in different assets or trading targets. It can help you independently manage the profit and loss of each position.
4. Concentrated investment transactions:
   • The cross margin mode is suitable for concentrated investment strategies, especially when you have a strong directional judgment on the market, you can allow all margin to participate in the transaction to increase potential profits.
5. Understand personal risk appetite:
   • If you are a risk-averse trader who prefers a conservative fund management strategy, the isolated margin model may be more suitable for you, because it can help you limit and control the risk of each transaction.
   • If you are a risk-accepting trader who is willing to take higher risks in order to obtain higher returns, the cross margin model can provide higher capital utilization efficiency.