What is The Difference Between Isolated Margin And Cross Margin
If there is one thing about the cryptocurrency market, which is both true and known even to the greenest of traders, it is its exceptionally high volatility. No other market can compete with crypto trading when it comes to the ultra-rapid changes in prices: peaks and crashes change one another at an incredible pace. Such a unique situation creates both prosperous and dangerous situations for traders. Those who wish to win must possess a deep understanding of crypto market mechanisms. The difference between isolated margin and cross margin is a great example of such necessary knowledge: investors must understand all the nuances of these margin management modes to resist the risk of liquidation and maintain winning long-term strategies.
Hence, what are cross margin and isolated margin?
This trading mode represents an initial margin, which is applied to an open order position. This type of margin management is eligible for manual corrections. The first obvious advantage of this margin comes with the title: it allows traders to separate and control different shares of their funds.
How does it work? Traders may establish a certain restriction: once the margin is assigned to a certain position with a limiting amount, it becomes independent, securing the rest of the crypto assets. When the margin falls below the designated level, other funds stay safe: the liquidation involves solely the assigned position.
Advantages of Isolated Margin
Isolated margin has a significant number of advantages, as follows:
● Risk management is associated with the separation of risks: the trader chooses higher risks when it comes to individual options, receiving decreased probability of a total loss when it comes to the total of their funds.
● Precise control of all assets.
● Clear restriction of probable losses.
● High flexibility and time management.
Disadvantages of Isolated Margin
Just like all types of trading tools, this type of margin has intrinsic drawbacks — each trading approach comes with a rather narrow niche for an optimal application. In this case, the main disadvantage is all about a higher risk of liquidation — a tolerable flaw in terms of tactical decision-making, yet a potentially harmful feature from the point of view of long-term strategies.
As we already mentioned, the crypto market is all about high volatility, which somewhat restricts the appropriateness of isolated margins. For instance, when it comes to a high level of leverage, the movement of prices experiences significant multiplication. One can earn a 100% profit even with a 1% move in case of a 100-x leverage level. Nonetheless, the same 1% move in the antagonistic direction results in a total loss.
Another way to deal with extreme volatility is to rely on automatic tools, which reduce the frequency of catastrophic losses. Of course, modern software is incapable of replacing human judgment when it comes to such an intellectual accomplishment as trading. However, it may assist by enhancing the results of the human mind. For instance, tools like Jet-Bot provide traders and investors with an opportunity to learn and even duplicate the decisions of top traders.
This software automatically tracks all actions of the chosen player, mimicking all their moves. As a result, one obtains a doubled profit: a chance to earn along with an opportunity to learn. Of course, this approach does not guarantee the safety of your funds — as we have already seen losses are inevitable. Nonetheless, it makes it possible to maneuver around them, combine the achievements of the greatest minds engaged in crypto trading, and optimize one’s learning curve in the art of high-level investments.
Unlike the previous approach, which deals in completely isolated trading pairs, this type of margin uses all available funds. All positions assigned by the user share the same margin. This option has an obvious benefit: users always have considerable breathing space. Thanks to a higher degree of safety, traders may resist liquidation with higher efficiency.
Of course, one cannot build a working strategy relying solely on its resistance to liquidation — redundantly safe approaches usually bring lower profits in short-term deals. However, it provides a reliable option for various long-term trading paradigms. This precaution is essential when it comes to crypto trading. Unpredictable fluctuations in prices, which may pass through assigned barriers multiple times within mere hours, are necessitating the need for practical approaches.
Advantages of Cross Margin
The main advantage of this trading approach revolves around its conceptual difference from the isolated margin mode. Once again, what is the difference between cross margin and isolated margin? The former increases the trader’s resistance, making it considerably easier to avoid liquidation, whereas the latter deals with separated risks at the cost of a higher probability of liquidation of each isolated position.
As for the considerable pros of this approach, the list includes the following features:
● Risk management is based on the consolidation of risks and precautions: the trader chooses to increase their resistance to liquidation, relying on the supplementary account equity.
● Increased reliability (especially when it comes to hyper-volatile variants).
● Additional layers of safety.
● Optimized monitoring.
● Decreased psychological pressure because of an increased space for maneuver and time allotted for decision-making.
Disadvantages of Isolated Margin
The main crucial disadvantage of the proposed risk-management paradigm is its inability to divide and control. Players have to use an all-in approach instead of minimizing their potential losses. Increased response time may also seriously limit one’s flexibility. In addition, this paradigm is designed for long-term approaches; therefore, cost savings are secondary in comparison with higher reliability.
Margins and Leverage: Is There a Connection
When we talk about applying leverage, we mean trading with borrowed assets. Its main advantage is an instant amplification of its financial strength. Although quite confusing for inexperienced traders, it represents a potent financial tool: depending on the initial investment (usually called “collateral”) users can trade with an up to 100-x multiplier. The total value of the opened position provides an initial margin.
However, in addition to an initial margin, the trader also has to determine a maintenance margin: this is the last barrier on the way to liquidation. If the market moves in an antagonistic direction and the margin falls below the maintenance limit, the position suffers the risk of liquidation. Before it happens, the platform notifies the user. One can either pump up more resources to preserve the position or allow it to happen.
Here lies the essential connection between the mentioned types of margins and leveraging: a level of leverage is inversely related to the determined margin. The higher the level of leverage is applied, the less margin is used and vice versa. Hence, high leverage reduces the room for loss, increasing the risk of liquidation.
This is why options with high leverage attract enthusiasts of the isolated margin approach: division of risks generally reduces the probability of a total loss, which is always high in extremely volatile markets.
Both approaches provide a considerable variety of advantages. It is also clear that no option has a decisive victory: while offering huge benefits, each margin comes with intrinsic drawbacks. As a rule, traders tend to select cross margins: they are usually easier to work with. In addition, higher reliability makes a significant difference in long-term strategies. However, evaluation of these risk-management paradigms depends on the nuances of the current situation in the market.