When it comes to cryptocurrency trading, most people will encounter contracts. In contracts, we need to choose between cross margin and isolated margin.
In digital currency contract trading, cross margin and isolated margin are two different margin modes.
In cross margin mode, all available balances of the investor are viewed as margin. This means that if positions incur losses exceeding the account balance, the investor faces the risk of liquidation. The advantage of cross margin mode is that it can enhance the account's loss-absorbing capability, especially in low leverage and low price volatility situations. This mode is typically used for hedging and quantitative trading.
Isolated margin mode is different, allowing investors to set margins for each opened position separately. In isolated margin mode, the risks of short and long positions are calculated independently, and when investors face liquidation, they will only lose the margin of that direction's position, without affecting other funds in the account. The advantage of isolated margin mode is its flexibility, suitable for those who want to strictly control risks.
In short, cross margin mode is suitable for investors who are confident in the market and wish to utilize all their funds to increase profit potential, while isolated margin mode is suitable for those who want to diversify risks and have strict control over losses in a single trade. The choice of which mode to use depends on individual trading strategies and risk preferences.
First, Characteristics and Applications of Isolated Margin
Definition and Operation: In the isolated margin mode, the margin amount for a specific position is limited. Users can decide how much to allocate as collateral for that specific position, while the remaining funds remain unaffected by the trade. For example, if the total account balance is 10 BTC and it is believed that the price of Ether will rise, one may decide to open a long leveraged position in ETH and allocate 2 BTC as isolated margin with a leverage ratio of 5:1, meaning trading with ETH worth 10 BTC (2 BTC of own funds + 8 BTC of leveraged position). If the price of ETH rises, the gains are accounted into the 2 BTC initial margin; if the price falls sharply, the maximum loss is the 2 BTC of isolated margin, and the remaining 8 BTC in the account are unaffected. Advantages and Disadvantages Analysis
Advantages:
Controllable Risks: One can decide how much to allocate for a specific position and losses, with only that amount facing the risk of loss, while the remaining funds in the account are unaffected. Clearer Profit and Loss: It is easier to calculate the profits and losses of a position because of knowing the exact amount allocated to it. Predictability: By isolating funds, traders can predict the maximum loss they may face in the worst-case scenario, helping to better manage risks.
Disadvantages:
Requires close monitoring: Only part of the funds is used as collateral for the position, necessitating closer monitoring of trades to avoid forced liquidation. Limited leverage: If a trade starts to incur losses and approaches forced liquidation, it cannot automatically use the remaining account funds to stop it; additional funds must be manually added to the position's margin. Higher management costs: Managing multiple margin positions across different trades can be quite complex, leading to higher management costs for beginners or traders managing many positions.
Second, Characteristics and Applications of Cross Margin
Definition and Operation: Cross Margin uses all available funds in the account as collateral for all trades. If one position incurs a loss while another gains, the gains can be used to offset the losses, thereby extending the holding time. For example, if the total account balance is 10 BTC, a long leveraged position in ETH and a short leveraged position in another cryptocurrency Z are opened under the cross margin mode, using ETH worth 4 BTC and Z worth 6 BTC for trading, both at a leverage of 2:1. The total account balance of 10 BTC will serve as collateral for these two positions. If the price of ETH falls and the price of Z also falls, the profits from the short position can offset the losses from the ETH trade, allowing both positions to maintain their status; if the price of ETH falls while the price of Z rises, both positions may face losses, and if the losses exceed the total account balance, both positions may be forcibly liquidated, potentially losing the entire account balance.
Advantages and Disadvantages Analysis
Advantages:
More Flexible Margin Allocation: Cross Margin will automatically utilize all available balances in the account, avoiding any open positions from being forcibly liquidated, providing higher liquidity.
Offsetting Positions: Profits and losses between positions can offset each other, which may be advantageous for hedging strategies.
Reducing Liquidation Risk: By pooling all balances, it reduces the risk of any individual position being prematurely liquidated, meeting margin requirements. Easily manage multiple trades: There is no need to adjust the margin for each trade separately, simplifying the process of managing multiple trades simultaneously.
Disadvantages:
Higher Overall Liquidation Risk: If all positions incur losses and the total losses exceed the total account balance, there is a risk of losing the entire account balance. Weaker control over individual trades: Since the margin is shared across all trades, it is difficult to set specific risk-return ratios for individual trades. Potential for Excessive Leverage: Traders may tend to open larger positions than in isolated margin mode, leading to greater losses.
Risk Exposure is Not Clear Enough: Traders find it difficult to clearly measure overall risk exposure, especially when there are multiple open positions with varying degrees of profit and loss.
Third, Main Differences Between Isolated Margin and Cross Margin
Collateral and Liquidation Mechanism
Isolated Margin: Only a portion of funds is reserved for a specific trade, and only that portion faces the risk of loss. If 2 BTC are used for trading in isolated margin mode, only those 2 BTC are at risk of forced liquidation.
Cross Margin: All funds in the account are used as collateral for trading. If a position incurs losses, the system can utilize the entire account balance to prevent that position from being forcibly liquidated. However, if multiple trades incur significant losses, it may result in the loss of the entire balance.
Risk Management
Isolated Margin: Allows for more refined risk management. Specific amounts that one is willing to lose can be allocated for each trade without affecting the remaining account balance. Cross Margin: Integrates the risks of all open positions. It can be useful when managing multiple positions that may offset each other, but aggregating the risks of all positions may mean higher potential losses.
Flexibility
Isolated Margin: If one wishes to increase the margin, they must manually add more funds to that isolated margin position. Cross Margin: Automatically utilizes all available balances in the account to prevent any position from being forcibly liquidated, avoiding the need for frequent maintenance margin payments.
Use Cases
Isolated Margin: Suitable for traders who want to manage risk on a per-trade basis, especially those who have high confidence in specific trades and wish to manage risk separately.
Cross Margin: More suitable for traders holding multiple positions that may hedge each other or those wishing to use the entire account balance without frequently paying maintenance margin.
Fourth, Examples Combining Isolated Margin and Cross Margin
In cryptocurrency trading, isolated margin and cross margin strategies can be combined to maximize returns while minimizing risks. For example, due to an upcoming upgrade of Ethereum, one might believe that the price of ETH will rise but also wants to hedge against potential risks from overall market fluctuations, suspecting that BTC may decline. One can use the isolated margin mode for a portion of the portfolio (e.g., 30%), utilizing that portion of funds to open a long leveraged position in ETH, limiting potential losses to within 30%. If the price of ETH rises, substantial gains can be achieved. For the remaining 70% of the portfolio, the cross margin mode can be used to open short positions in BTC and long positions in another competing currency Z. This way, potential gains from one position can offset potential losses in another. Once these positions are set up, continuous monitoring of both strategies is needed, adjusting the positions according to market conditions.
Fifth, Definition and Operation of Margin Trading
Concept of Margin Trading: Margin trading is the process of obtaining higher cryptocurrency positions from cash funds. Through this method, the required amount of cryptocurrency can be effectively borrowed and returned after achieving the goal. In margin trading, initial collateral is required to initiate trades. Using isolated margin, collateral can be placed on a single margin position to gain temporary cryptocurrency liquidity; using cross margin, the entire margin portfolio is viewed as a margin position.
Initial Margin and Maintenance Margin
Initial Margin: The minimum amount required for the position requested. The initial margin requirements vary across different trading platforms, with mature platforms having strict requirements while new platforms are relatively lenient. Maintenance Margin: The total funds required to maintain leveraged positions in the account. Maintenance margin usually fluctuates based on the price differences of the corresponding cryptocurrency, and keeping a level of funds in the account is crucial to maintain positions. If the maintenance margin level cannot be met, a margin call notification may be received, and there may even be a forced liquidation of the entire leveraged position. Actual cases of margin trading involve traders entering the cryptocurrency market for investment with the hope of making a profit. They choose a trading platform that meets their needs and offers favorable trading fees, and prepare a trading account. However, when funds are limited and significant trades cannot be executed, margin trading can be considered. By using the funds provided by the trading platform's algorithms, as long as the trading funds are sufficient to cover the initial margin, traders can start selecting suitable margin position values according to their plans. Determining the trader's position and how much margin should be maintained will decide the success or failure of most trades. When selecting margin, it is essential to consider the entire trading plan and accurately predict future price changes to profit from margin trading. If the goal is to take risky bets, maintain low leverage to avoid sacrificing the initial investment; if a price change is likely to occur, leverage can be set proportionally higher.
Sixth, Comparison of Cross Margin and Isolated Margin Trading Modes
Isolated Margin Mode: Isolated margin is a strategy that allows for risk-taking efforts without losing valuable assets. It allows for opening a position that is completely isolated from other accounts, meaning whatever happens to that position will not affect the remaining portfolio. For instance, when taking a risk by purchasing new cryptocurrencies or betting on high-risk price discrepancies in the market, using an isolated margin account can take risks and gain the desired leverage without compromising other funds. Thus, the risk of trading failure is relatively low, enabling traders to pursue different strategies and reduce liquidation risk. Cross Margin Mode: The cross margin mode is entirely different from the isolated margin mode. If there are multiple margin positions and the margin requirements increase, making it difficult to cover initial and maintenance margins, the cross margin mode can be used. In this mode, traders can consolidate positions with a unified margin balance, allowing multiple positions to share the margin balance. However, the cross margin mode is less appealing in high-risk scenarios because the threat of additional margin exists throughout the entire margin portfolio. If price changes do not succeed, it may sacrifice months or even years of hard work. Although cross margin does not adapt to opportunistic decisions, it allows traders to build large portfolios, compensating for risk in trading volume.
Seventh, Differences Between Margin Trading and Regular Trading
Margin trading is much more complex than spot trading, requiring traders to analyze many potential scenarios in the market. Spot trading also carries risks, but owning collateral rather than the actual cryptocurrency asset may be profitable in certain circumstances. Therefore, margin trading may also be beneficial for new investors who wish to avoid directly owning specific cryptocurrencies but want to invest in their success. However, it is still important to carefully consider choices and stick to familiar options.
Eighth, The Value and Risks of Margin Trading
Margin trading carries certain risks, but if initial margin and maintenance margin are carefully controlled and an effective risk-separating margin trading portfolio is established, it can also change the dynamics of investment. It is recommended to familiarize oneself with the fundamentals before deciding to engage in margin trading, understanding initial margin and maintenance margin, and mastering the comparison between isolated margin and cross margin. Being well-prepared is key to success in a competitive market, and margin trading requires the trader's full attention. In summary, isolated margin and cross margin each have their characteristics and application scenarios in cryptocurrency trading. Traders should choose the type of margin that suits their trading strategies, risk tolerance, and position management needs to achieve investment goals and effectively manage risks.
