Cross Margin vs Isolated Margin or “Which one is less likely to wreck my deposit?”
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.
Considering how volatile crypto assets are and how wildly prices can fluctuate intraday, Cross Margin is a reliable trading method, allowing you to avoid being liquidated because of a minuscule price fluctuation. However, depending on the situation, cross margin orders can also munch on your deposit quicker than Joey Chesnut would eat a hot dog. This margin method is useful for users who are hedging existing positions and also for arbitragers that do not wish to be exposed on one side of the trade in the event of a liquidation.
Isolated Margin is useful for speculative positions. By isolating the margin the position uses, you can limit your losses to the initial margin set, and thus helps short-term speculative trade ideas that turned out incorrectly. In a volatile market, a highly leveraged position can lose equity quickly. With isolated margin, orders can become liquidated quickly during powerful moves if leverage is high. In this case, though, everything you risk is the order, not your whole portfolio.
At the end of the day, choosing between cross and isolated margin is highly situational. The crypto market is highly volatile, and movements against you can easily do a 180 degree flip and bring you fat profits in the end of your trading session, making cross margin the method of choice. However, the problem is that the same movement has a chance to continue going against you until it eats away at your portfolio, leaving you with a squeaky clean, 0.00 USDT deposit, making the Isolated Margin the method to go in this situation.
If you got here and still want to know more, then make sure to also check out our Beginner’s Guide to Trading Crypto!
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