Any trader that is into crypto margin trading has probably thought about the difference between cross margin vs isolated margin. It is one of the most important risk mitigation factors to any margin account, but it is widely misunderstood.
It’s well known that one of the best crypto margin trading strategies is to use high leverage combined with isolated margin for maximum upside while keeping your risk at a minimum.
Did you know that you can’t liquidate your account balance when using isolated margin? The only way to get liquidated in crypto trading is if you choose to activate cross margin.
Below are some common questions that I will answer throughout this article.
- Should you trade with cross or isolated margin?
- When is isolated better than cross margin?
- Which one is safer to use for trading?
These questions and much more will be explained in this article which is going to be solely on the topic of cross vs isolated margin in crypto trading.
The most popular way of trading crypto on margin is cross margin, which is also the riskiest way to do it. Many traders don’t know it but the default setting on most crypto exchanges is cross.
This can easily be changed by the trader on the account setting page. If you are searching for an exchange where you have the option to choose between both modes I recommend that you visit our guide on the best crypto margin trading platforms.
What is the difference between cross margin and isolated margin?
Cross margin means that every open position has access to all your margin capital in your account which can be used in the case of a loss. In contrast, isolated margin limits the total loss and access to the margin balance used for opening one position only.
This is fundamental from a risk perspective and for any trader that wishes to trade with less risk or be more flexible with the account balance.
Below you can see how to change between cross margin and isolated margin on the crypto exchange BitYard.
- Cross margin = Margin is shared between all open positions. If the margin requirement falls below 0%, all positions will be liquidated.
- Isolated margin = Margin is restricted to one position only. If the margin requirement falls below 0%, only 1 position will be liquidated.
This means that if you open a position with cross margin activated, all your funds in your account are at risk. If you open a position with isolated margin you only risk the margin balance attached to that position.
Isolated margin explained
When isolated margin is used on a crypto exchange it means that the collateral margin used to open the position is the maximum amount of money you can lose on that position.
The total risk is isolated to the collateral used to open the margin trade and this is the safer option since you limit the overall risk.
Let’s say that your account balance is $2000 and you want to use $50 to open a margin trade.
When you select isolated margin you limit the total loss of that position to $50 and the rest of your account balance, $1950, stays intact no matter what happens to the position.
There are some special situations when isolated margin is the preferred option which I will discuss in the next section. I will also go through exactly how to apply it on your exchange.
When to use isolated margin
You have researched and found nothing about when to actually use the isolated option on your exchange. Good, for you, you have landed on the one page that delivers hard facts.
Below is a list of situations where you would be better off choosing the isolated margin:
- When you have several positions open at the same time
- When you use most of your margin balance to open several positions
- When you don’t use a stop loss order
- When you are trading on very high leverage
- When market conditions experience very high volatility
- When you short-sell the market
- When you want increased account protection
- When you are a complete beginner
If you fit any of these statements you should probably use the isolated option on your crypto derivatives exchange to avoid losing more money than you have planned for. Use this setting with a crypto exchange to block profits for the highest risk mitigation setup.
When you are using a crypto exchange that allows shorting it is crucial that you use isolated margin to stop unwanted losses from occurring.
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How to use isolated margin
To activate the isolated margin on your crypto exchange, follow these instructions:
- Log in to your exchange
- Choose your contract (Lite, Futures, Swaps, Perpetuals..)
- Inside the trading interface, locate the cross/isolated margin selection
- Click the isolated option and confirm
Now your losses are limited to the margin collateral used for one position only.
It is important to do these steps each time you open a position as different exchanges have different default settings on their platform.
Can isolated margin liquidate you?
Yes, it can, but only the position that is opened with this option can get liquidated.
For example, if you use $100 to open a leveraged position in BTC/USDT and the market falls quickly, the total liquidation would only be $100.
The rest of your margin balance stays untouched.
This is the main reason why I recommend beginners to start with isolated margin, to avoid total account liquidation.
Benefits and drawbacks
There are of course some pros and cons to choosing this option. Below is a table indicating the most important benefits and drawbacks.
|∙Limits the losses to the margin capital used for one position||∙The position has less wiggle room|
|∙Better option seen from a risk management perspective||∙Beginners can easily get liquidated in volatile markets|
|∙Better option for beginners|
Cross margin explained
Cross margin means that you allow any of your open positions to access all your margin balance in your account in case of a loss. This means that if one position takes a big loss, it can hurt the entire portfolio.
The cross margin is designed for a more loose risk management approach where all your open positions have access to the same pool of capital in your account.
In theory, one position could wipe out your entire account if it goes really bad because it will use up all the leftover margin in your account until your margin balance hits 0%.
Once you hit a 0% margin in your account you suffer a complete liquidation.
This is of course the most extreme case but it’s worth mentioning because it happens a lot among beginner crypto traders.
There are of course some situations where cross margin would be preferred which I will discuss more on in the next section.
When to use cross margin
Cross margin can be used on several different occasions but traders usually get it wrong and they end up losing more crypto than necessary.
Below is a list of the most optimal situations when cross margin is preferred:
- When you are using less than 20% of your margin balance
- When the market volatility is lower
- When you are in a long-term trade
- When you are buying
- When you use lower levels of leverage
- When you are using proper risk management
- When you are only trading one or two positions at the same time
- When you are using a stop loss
It goes without saying that cross margin is a more complex setting and it should always be operated by an experienced trader. If you are a complete beginner you are advised to not use this option.
How to use cross margin
The step-by-step process to activate cross margin on your crypto exchange is as followed:
- Log in to your exchange.
- Choose your contract (Futures, Lite contracts, Perpetuals, Swaps..)
- Located the cross/isolated margin selection inside your trading interface
- Click cross and then click Confirm
When this option is activated all your open positions will have full access to all your margin balance.
This calls for some high-level risk management skills and you should not operate in this environment unless you have sufficient experience in how to size your positions.
Can cross margin get you liquidated?
Yes, when this option is selected on your crypto exchange you run the risk of getting completely liquidated.
In fact, one single position that turns out to be a big loser could ruin your whole trading account by first eating up all your margin balance, which turns into a margin call, which later on liquidates your account.
Cross margin is the riskiest setting when trading cryptocurrencies on leverage and is not advised for beginners.
Make sure you are fully aware of all the risks and understand how your margin balance is affected before using this option.
Benefits and drawbacks
Let’s break it down into some pros and cons so that you can easily see how and when it would be a good time to active cross margin on your platform.
|∙Very good for swing traders with one or two positions open||∙Risk of losing all your money through liquidation|
|∙Good option when only 20% of your margin is used||∙Difficult to control for beginners|
|∙Great for low-volatility market conditions||∙One position can ruin your account|
Which one is better to trade with?
Now, when it comes down to choosing between these two options you first need to make sure that you understand both concepts in detail.
From here you should take a look at your style of trading and your approach to the markets.
Does it fit cross margin or does it fit isolated margin?
Most beginners are better off using the isolated option while experienced traders that are comfortable taking on more risk can choose the cross version.
Overall, isolated margin brings less risk but also less flexibility due to the limited wiggle room your positions have.
Cross margin has a higher risk factor but it lets your positions move more freely which can be better for swing traders that are not dependent on quick profits.
Most modern and popular crypto exchanges for day trading have both options to give traders maximum flexibility.
Final words – Which one is safer?
There is no doubt that isolated margin is the safer option since it will prevent you from total account liquidation.
Your total risk is the amount of margin capital that is tied up in each position.
It doesn’t matter if one position goes down the drain, your account balance will still be intact.
If you are a risk-averse trader you should use isolated margin.