Difference Between Cross Margin and Isolated Margin

Article Summary

• How Cross Margin and Isolated Margin Work: Cross Margin uses the entire Margin Balance as collateral for all open positions, while Isolated Margin allocates specific Margin per position according to the Initial Margin required. These two Margin Modes determine how margin is allocated which has a direct impact on risk management in the perpetual futures market.
• Pros and Cons of Cross Margin and Isolated Margin: Cross Margin offers flexibility as the floating profit of one position can automatically support other losing positions, but the risk is higher as the floating loss has the potential to liquidate the entire position at once. Isolated Margin, on the other hand, provides tighter protection by limiting the maximum loss per position, although it requires more precise margin allocation calculations.
• Difference between Cross Margin and Isolated Margin: In terms of complexity, margin allocation, position risk, and PnL calculation, these two Margin Modes have different characteristics and are suitable for different trader profiles. Cross Margin is more suitable for experienced traders who manage multiple positions, while Isolated Margin is more suitable for traders who prioritize risk control per position.

Why it’s important to understand Cross Margin and Isolated Margin

Cross Margin and Isolated Margin are two Margin Modes that every trader who actively opens leveraged positions in the perpetual futures market must understand. These two modes determine how the Margin, or collateral asset, used to support each opened position is allocated.

Perpetual futures trading is an instrument that demands much stricter risk management than the spot market, including in terms of position sizing calculations. Unlike spot, position sizing in the perpetual futures market is highly dependent on the amount of Margin a trader has and the Margin Mode used.

Given that these two Margin Modes have different characteristics and uses, understanding them will be helpful in determining which mode best suits each trader’s strategy and risk profile.

What is Cross Margin?

In perpetual futures trading, Cross Margin is a mode that uses the entire margin balance in the futures account to support all open positions. The Margin Usage percentage will fluctuate dynamically according to the condition of active positions, whether in profit or loss.

Margin allocation in these two modes works differently. In Cross Margin, Margin Usage changes dynamically with the state of active positions, as the entire Margin balance in the Futures account is used to support all open positions.

How Cross Margin Works

• Margin Balance in a futures account serves as the balance that holds all opened positions.
• The smaller the leverage, the larger the Initial Margin used to open a position. And vice versa.
• At Pintu Futures, the balance locked when a trader opens a position depends on whether the IM Buffer used is active or not. If it is active, then the balance locked is larger. Otherwise, only 1% or MM is locked.
• The balance that a trader can use to open new positions depends on the Available Margin, as this remaining balance will also be used to hold positions in Cross Margin mode.

In Cross Margin, when a position is in a continuous floating loss condition, the Margin will gradually decrease until it is below the MM limit and the position may be in danger of being liquidated by the system.

On the other hand, Cross Margin offers greater flexibility in margin allocation. When a position is in a floating profit condition, the profit will immediately accumulate into the Available Margin.

This means that when a trader is in a floating loss condition and still insists on opening a new position or increasing the size of an existing position, it actually increases the risk of liquidation. This happens because the use of Margin becomes increasingly large, while the Margin owned continues to be eroded by floating losses.

Pros of Cross Margin

1. The main advantage of Cross Margin is the flexibility of managing multiple positions simultaneously, floating profits from one position can automatically support other positions that are experiencing floating losses, so traders do not need to manually add Margin to positions that are experiencing floating losses.
2. This is ideal when opening positions on highly volatile assets, as the Margin available in the account will automatically absorb the losses of positions that are at a loss, so traders do not need to manually add Margin to keep positions active.
3. It is more efficient to manage multiple positions at once because all open positions are supported by the same source of Margin, namely Available Margin, so there is no need to allocate Margin separately for each position.

Disadvantages of Cross Margin

1. The main risk of Cross Margin is that when all open positions experience a floating loss simultaneously, Available Margin will continue to erode until Margin usage approaches 100% and all positions are potentially liquidated at once.
2. Less ideal for traders who want to limit risk per position precisely, as losses from one position can have a direct impact on Margin availability for other positions.

What is Isolated Margin?

Isolated Margin is a Margin Mode that is manually and specifically allocated to open one particular leveraged position. Unlike Cross Margin which uses the entire Margin in the account as the balance that supports the position, Isolated Margin limits the risk to only the amount of Margin that has been assigned to the position. This means that the maximum loss a trader can incur is clear from the outset before the position is opened.

When a trader wants to open a position with Isolated Margin mode, the trader cannot directly allocate the specific Margin that the trader wants, but the Margin allocation used will match the Initial Margin used to open a particular position.

Margin Usage in this case will be allocated a different portion in each position, if one position is liquidated, the other positions and Margin will not be affected. Therefore, the use of Isolated Margin requires more precise calculations and careful management of risk tolerance in determining the optimal amount of Margin to be allocated to each position.

How Isolated Margin Works

• The margin required to open a futures trading position with Isolated Margin mode is IM. This balance will be locked and cannot be moved/deducted while the position is active.
• Traders must have enough Margin Balance as IM to open a position. In the scenario in the table above, traders must have 400 USDT as IM.
• Traders must keep their positions at less than MM to avoid liquidation.
• If a trader opens more than 1 position, he/she will need to allocate each Margin according to the IM required for each position.

In Isolated Margin mode, a trader’s floating PnL does not affect the Margin that has been allocated to open a position. However, traders still need to keep the position value on each contract from approaching the MM limit. If the position value starts to approach the MM threshold, traders can add Margin to the contract to reduce the risk of liquidation.

Excess Isolated Margin

1. The main advantage of Isolated Margin lies in Margin protection. Margin Balance that is not allocated or exposed to a position in this mode will remain safe and will not be affected by liquidation.
2. The allocated margin can be used as a maximum limit for potential losses on each position opened.
3. This mode can be used as one of the references for beginners who want to try the perpetual futures market without having to sacrifice all their Margin.
4. Isolated Margin can be utilized as a mode to implement certain experimental strategies, as traders do not need to allocate their entire Margin to a single position.

Isolated Margin Drawbacks

1. Isolated Margin does not have high flexibility in allocating Margin.
2. Using Cross and Isolated Margin modes at the same or different times can increase the complexity of position management, especially if a trader has more than one position open. This makes margin setting, risk monitoring and decision-making more difficult, especially for inexperienced traders.

Key Differences between Cross and Isolated Margin

Conclusion

Cross Margin and Isolated Margin are two Margin Modes with different approaches to managing risk in the perpetual futures market, where Cross Margin offers high flexibility as the entire Margin is used to support all positions with the risk that floating losses can affect the entire Margin in the Futures account, while Isolated Margin provides more measurable risk control by limiting losses on each position, so the selection needs to be adjusted to the strategy and risk tolerance of each trader.

Frequently Asked Questions (FAQs)

What is the main difference between Cross Margin and Isolated Margin?

The main difference lies in the way the margin is allocated. Cross Margin uses the entire Margin Balance to support all open positions, so that floating profits from one position can help other losing positions. Meanwhile, Isolated Margin allocates margin separately per position according to the Initial Margin required, if one position is liquidated, other positions and margins will not be affected.

Can Cross Margin protect positions from quick liquidation?

Under certain conditions, yes. Since the entire Margin Balance becomes a buffer for all positions, floating profits from other positions may slow down the process of reducing margin due to losses. However, if all positions experience a floating loss simultaneously, Available Margin will continue to decrease until Margin Usage approaches 100% and all positions are potentially liquidated at once.

Does Isolated Margin limit losses?

Yes. The margin allocated to each position in Isolated Margin mode serves as the maximum limit of potential losses on that position. The unallocated Margin Balance will remain safe and unaffected even if the position is liquidated.

Is Cross Margin suitable for beginners?

While Cross Margin is simpler in terms of position management as there is no need to manually calculate the Margin allocation per position, the risk is much higher. Floating losses that continue to grow can erode the entire account balance. Isolated Margin is actually more recommended for beginners because traders do not need to sacrifice all of their margin and the loss per position is defined from the start.

Are all positions affected when Cross Margin is exposed to losses?

Yes, that’s the main risk of Cross Margin. Since the entire Margin Balance is collateral for all positions, the floating loss of one position immediately reduces the Available Margin that supports all other positions. If losses continue to grow and Margin Usage approaches 100%, the system will automatically liquidate all open positions, not just the losing ones.

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