Cross Margin and Isolated Margin Explained

27 Nov 2023 by Harry Newman 4 min read

Margin trading is a popular strategy utilised by traders that can amplify potential gains or losses.

Margin trading consists of cross-margin and isolated margin.

Each one involves different risk management and a deep understanding of what they are and how they work, margin trading is a powerful tool if used correctly.

What is Margin Trading

Margin trading involves borrowing funds to increase potential returns on an investment.

Traders can open positions that are larger than their existing account balance.

However, this comes with increased risk as both gains and losses are amplified.

Margin trading is a high-risk strategy that requires a thorough understanding of market dynamics and proper risk management.

When margin trading you use leverage, which ranges from 1x leverage to the riskier 100x or more leverage.

The higher the leverage the more risk and likelihood of you losing money if the cryptocurrency loses value, but also greater profits if the cryptocurrency gains value.

With higher leverage, any small price movement will affect your account significantly.

Generally, it is best to stick between 1x and 10x leverage, any more brings increased risk.

Cross-Margin Trading

Cross margin Trading is a method that utilises the full amount of funds in a trading account to avoid liquidations on positions.

Margin is shared between open positions, when needed a position will draw more margin from the total account balance to avoid liquidation.

In cross-margin trading, the entire balance of the trader’s account is at risk, if a trade goes wrong, the trading platform can use all available funds to cover the loss, up to the total account balance.

Risk is reduced by spreading across all open positions, if one position goes into a loss, it can be balanced out by gains from another position you have open, using the total account balance to sustain the positions.

For example, if a trader has £1000 in their trading account and opens a position using cross margin.

If the position starts to lose value but another trade is up by the same amount, the losses and gains offset each other.

If all positions start to lose value the entire account balance is at risk of liquidation.

Cross-margin trading generally has a greater capacity to avoid liquidation, therefore, it is more useful to apply for a long-term strategy which requires the position to survive under volatile market conditions.

Isolated Margin Trading

With an isolated margin, funds are assigned to a position and only affect that position, unlike cross-margin trading.

If the margin falls below the maintenance margin required the position is liquidated, you can add or remove the funds at will to prevent this from happening.

Only a specified amount of a trader's total capital is put at risk for each trade, this amount is isolated for that position.

A trader can decide the exact amount of funds they are willing to risk on a position If a trade goes against them, only the isolated portion can be liquidated, protecting the rest of the account balance.

For example, imagine a trader has £1000 and chooses to use an isolated margin, and they allocated £200 for a particular trade.

If the trade is unsuccessful, only the £200 is at risk, and the rest of the £800 balance remains unaffected.

Isolated margin is more flexible and restricts the loss of funds only to an individual trade.

Full attention is required to the market to adjust the margin accordingly, this is best used for short-term high profit.

Cross Margin vs Isolated Margin

Cross margin has risk spread across the whole account potentially leading to total account liquidation if multiple trades lose value. Isolated margin confines the risk to the allocated amount for each trade.

Cross-margin trading is best suited for traders employing complex strategies involving multiple positions, potentially long-term. Isolated margin is ideal for individual trading strategies and best used for short-term trading.

Cross-margin offers greater flexibility in balancing different trading positions, whereas isolated margin offers more control over the amount at risk, adding or removing margin as required.

Typically, cross-margin is used by traders who are comfortable with high risk, isolated margin is preferred by traders who wish to limit their risk exposure on a per-trade basis.

It is important to note that any amount of leverage can be used on cross-margin and isolated-margin trading,