The cryptocurrency market is among the most volatile financial markets across all asset classes. This is both a blessing and a curse for traders, as powerful volatility opens up the opportunity for the largest amount of profit, but equally creates a path for significant loss. The best way to mitigate risk is to have a deep understanding of the trading tools offered, and practice using the tools effectively.
Now, that there’s an Isolated Margin option for Binance Futures, then understanding the difference between Cross Margin versus Isolated Margin can mean the difference between being liquidated, or maintaining an open position until it becomes profitable.
What is the different between Cross Margin and Isolated Margin?
Isolated margin is the initial margin applied to an open order position. The benefit of isolated margin is that traders can control precisely how much capital they are willing to risk in order to limit potential losses in case the market moves against an open position.
Due to how volatile crypto assets are, prices can move quickly. And at 100x leverage, these powerful movements are amplified significantly. For example, a $100 order at 100x leverage has the potential to earn 100% profit with a mere 1% move. However, a 1% move in the opposite direction would result in liquidation.
Isolated margin can be adjusted manually, in order to add more funds to an open position. Traders can adjust isolated margin to have more control over leverage and liquidation price.
Cross margin differs from isolated margin in the sense that there is far less control for traders, but cross margin can be a useful tool if the trader’s goal is to avoid being liquidated.
With cross margin, all available funds in an account’s balance will be made available for an open position. Binance Exchange will automatically adjust margin for you, in order to prevent liquidations from occurring.
Not only can cross margin pull apply additional margin to a position automatically, it can apply realized PNL from other positions to help save a failing position from being liquidated.
Isolated Margin Example
If a trader opens an order for $100 using 100x leverage of isolated margin, and the price of the asset moves 1% in the opposite direction, the trader’s position would be liquidated. Or the trader would have to manually adjust the margin before the price movement occurs, which can be difficult to predict.
However, if cross margin was applied to the order, the platform would automatically apply any additional funds from available margin to prevent liquidation. This would increase unrealized losses, unless the market begins to move back in the direction the trader had originally predicted.
In this case, cross margin would have not only prevented a liquidation, but would lead to a successfully profitable position once the market turned back around. Cross margin traders can further limit their potential losses by setting a stop loss at appropriate levels.
Cross Margin Example
Another example shows why cross margin is the best choice for traders. If a trader has $1,000 in funds available in their Binance Futures account, then using 100x leverage gives the account the trading power of $100,000. If the trader opens a position in Bitcoin for $60K, 60% of the account equity will be allocated to margin requirements, leaving 40% of margin remaining.
If the trade begins to go in the wrong direction, the trader will lose money from the remaining equity in their account. So if unrealized loss reaches $300, only $100 in equity or 10% of the initial capital will remain. If another $100 worth of unrealized loss is accumulated, the trader will be stopped out.
If and when this happens, the original funds used for margin reserved to cover the margin will be released back into the account, and the trader will be able to make another trade.
Cross margin trading really is the most stress-free and comfortable way to trade on Binance Futures.
Cross Margin Advantages
On Futures, cross margin is the most recommended choice for crypto traders. Considering how volatile crypto assets are and how wildly prices can fluctuate intraday, cross margin is a far more reliable and less risky trading method.
With isolated margin, orders can become liquidated quickly during powerful moves if leverage is high. With cross margin, however, additional account equity is added as margin to an open order, protecting the trader from liquidation.
Thanks to cross margin, even trades made with strong conviction that initially appear to be unsuccessful can be held until the market turns around in the trader’s favor.
Cross margin offers the following advantages:
● Reduced risk
● Decreased time spent monitoring orders
● Less worry
● More reliable
● Greater flexibility
● Additional account protection
Cross margin is an extremely helpful tool in managing a trader’s open positions, mitigating risk, and maximizing profits. Traders can consider each margin type depending on the situation, however, it is recommended traders stick with cross margin as it is more reliable and can help lower overall risk.
If you got here and still want to know more, then make sure to also check out our Beginner’s Guide to Trading Crypto!
Check us out at https://moontrader.io