Many exchanges, like CoinEx, offer leverage or futures trading for their users so they can make profits from price movement in a highly volatile market. The future trading has two types of common margins used by the exchanges: Isolated and cross.
Each margin type comes with its own set of rules, benefits, and risks. Understanding how they work is crucial for protecting your capital and making smarter trades.
In this guide, we’ll break down the key differences so you can decide which margin mode best fits your trading strategy.
What is Cross Margin?
The cross margin is a type of margin in which all of your funds in your future account will be shared across all trade positions. This means the exchange will use your funds to cover up losses and prevent liquidations of any single position.
If you have opened four trade positions and one of them starts going against the market, the exchange will use your account balance, which will ultimately affect your other positions at the same time.
For example, you have selected the cross margin on CoinEx futures with $1000 in your account. Now, you have opened a long position on BTC/USDT with 3x leverage using $300 margin and a short position on ETH/USDT with the same leverage and $200 margin.
Now, suppose position BTC/USDT goes against you, and you're at risk of liquidation. Instead of immediately closing the position, the exchange automatically pulls from your remaining $500 unused balance (and even ETH/USDT margin if needed) to keep your first position afloat.
Pros & Cons of Cross Margin
Pros:
- Less Risk of Liquidation: In cross margin, the system will use your entire funds to prevent liquidations. This way, you have lower chances of losing in a trade.
- Efficient Use of Funds: The cross margin gives you more flexibility as the funds are automatically distributed among trades if they are going against you.
- Profit Potential: With a shared pool of capital, you can take larger positions. This maximizes your account’s capital efficiency and increases the potential for bigger gains.
Cons:
- Harder to Manage Risk Per Trade: When multiple positions are open, and the market turns, it becomes difficult to know which trade to close first.
- Risk of Full Liquidation: Since capital is shared across all trades, a severe market move could cause a chain reaction and liquidate your entire account. It's harder to isolate and contain risk.
What is Isolated Margin?
The isolated margin means that you can assign a fixed amount of margin in each of your trades, and the exchange won’t draw any funds from your account or other trades to save you from liquidation.
The losses in the isolated margin will be limited to that trade. In case of liquidation, your losses will not exceed the amount of your margin.
For example, you have opened a short position on BTC/USDT with a $200 in Isolated margin mode on CoinEx. If the BTC/USDT price sharply goes bullish, the platform will only use the $200 allocated to that specific trade. Even if the market moves further against you, the loss will never exceed $200.
Pros & Cons of Isolated Margin
Pros:
- Easily Manageable: In an Isolated margin, you can easily manage risk and decide which losing trade to close first in case the market goes against you.
- Better Risk Control: Isolated margin helps you keep your account safe from the impact of a single bad trade. Great for traders who want to stay disciplined.
- No Emotional Damage: Because isolated margin limits losses to the amount you assign to each trade, you won’t have to worry as much about your whole account being wiped out.
Cons:
- No Flexibility: An Isolated margin does not give you any flexibility in terms of funds. If a trade goes against you, you will need to add funds manually to avoid liquidation.
- Requires more active trade management: With isolated margin, each position needs its own margin allocation and risk assessment before entry. If you're trading multiple markets simultaneously, managing these individually can become time-consuming.
Which One Is Better For Leverage Trading?
If you are a beginner trader and have just stepped into futures trading, Isolated margin is better and considered less risky as compared to cross margin. Traders who prioritize capital preservation in leverage trading choose Isolated margin for their trades.
Moreover, Isolated margin allows you to manage funds and prevent large liquidation easily, unlike Cross margin. The losses in the Isolated margin are limited to your specified trades, protecting the rest of your account from unexpected liquidation.
Cross margin is primarily used by professional traders who have better risk management strategies, have a deep understanding of liquidation, and position sizing. In addition, Fast-paced traders who open and close many positions quickly might find isolated margin limiting. Cross margin offers more flexibility for rapid execution without margin bottlenecks.
Final Verdict
Both cross and isolated margin comes with their pros/cons for trading. If you are a professional trader with a ton of experience, cross margin could be an ideal option for you because it offers more flexibility. However, as a beginner, choose an isolated margin for better fund management and less risk for liquidation.
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