When we talk about trading or cryptocurrency trading, there are margin options that traders follow according to the market situations and their strategy including cross-margin and isolated margin. Being aware of these two great options in trading has its own advantages and disadvantages that help you to make an informed decision. In this article, we’ll get to know more about cross-margin vs isolated margin in detail and also get to know their key features, benefits, and many more, so read till the end.
What is the Isolated Margin in Crypto Trading?
Unlike cross-margin, an isolated margin is an option that is used at the time of buying and selling cryptocurrency. In this case, margin allows traders to allocate specific amounts of balances as collateral for each trade or position. In simpler terms, if traders opt for an isolated margin option while building any position, only a specific amount of balances will be allocated for that particular position and it doesn’t affect the remaining account balances.
Pros of Isolated-Margin
- Precise Risk Management: In an isolated margin option traders have control of their risks as only a specific amount of balances is allocated as collateral for an open position. This margin option provides features like stop-loss for individual positions and also book profit at specific levels; this helps traders minimize the overall risks associated with the trade.
- Lower Risk Exposure: Unlike cross-margin, the risk associated with any specific trade in an isolated margin option is quite low as this option allows traders to allocate specific amounts of balances to specific trade and doesn’t affect the overall account balance.
Cons of Isolated-Margin
- Potential for increased liquidation risk: In this margin option, if the trade goes against you then it might liquidate your specific allocated collateral fund for that specific trade. This means if you entered into any trade with an isolated margin and earlier while entering into a trade you also placed a stop-loss, in this case, if the trade goes against you and hits the stop-loss then the allocated collateral balance wipes out.
- Limited capital utilization: Isolated margin restricts the utilization of funds from unrealized profits on successful positions for new trades. Traders need to allocate fresh funds as collateral for each individual position, which may limit capital utilization.
What is Cross Margin in Crypto Trading?
Cross-margin is a margin option that traders use while buying and selling any cryptocurrency, and this margin option also allows traders to use their entire account balance as collateral for their open position. In simple terms, if traders opt for this option while trading this means all the funds of the account along with unrealized profit, if any, can be utilized to support your margin trade. Cross-margin allocates the margin on the basis of the total balance in your account for each position.
Pros of Cross-Margin
- Increase Flexibility: If the trader opts for cross-margin for any trade, by doing so all the funds or balances of the account will be utilized to support the trade.
- Reduce Liquidation Risk: By choosing the cross-margin option for a position, it utilizes all the account balances to support that particular trade. In case the trade performs poorly, then cross-margin helps to sustain your position and also lowers the chance of liquidation.
Cons of Cross-Margin
- High-Risk Exposure: Cross-margin minimises the chance of trade getting liquidated, however, it also comes with significant risk exposure. Any wrong or poorly performed trade can wipe out the overall account balance.
- Limited Risk Management: Cross margin doesn’t allow you to set any specific risk level such as stop-loss for each position. This means it is harder for traders to manage the risks associated with the cross-margin, although it also has the potential to wipe out whole account balances.
Which One is Better Isolated Margin or Cross Margin?
When choosing between cross-margin and isolated margin, various factors such as risk tolerance, trading strategy, and goals come into play. Both options have strengths and weaknesses, and the choice ultimately depends on individual preferences.
For traders seeking higher flexibility and a more hands-off approach, cross-margin can be a suitable choice. It allows for the maximum utilization of funds, provides a safety net against individual position liquidations, and facilitates the compounding of gains.
On the other hand, if precise risk management, defined position sizing, and lower overall risk exposure are desired, an isolated margin can be the preferred option. The ability to set individual risk parameters empowers traders to mitigate losses and better control their trades.
Key Differences Between Isolated Margin and Cross Margin
The key differences between isolated margin and cross margin are as follows:
Collateral Consideration: Cross margin utilizes the entire account balance as collateral, while isolated margin allocates specific funds for each position.
Capital Utilization and Risk Management: Cross margin offers increased capital utilization and safeguards against individual position liquidations, but it exposes traders to higher risk and lacks precise risk management. On the other hand, an isolated margin allows for precise risk management, defines position sizing, and limits risk exposure, but it might result in increased liquidation risk and reduce the flexibility of utilizing unrealized profits.
Both cross-margin and isolated margin have their own merits and drawbacks. Assessing your trading goals, risk appetite, and preferences will help you determine the most suitable margin option for cryptocurrency trading endeavors.