Introduction to Cross Margin Trading
Margin trading allows investors to borrow funds from an exchange or brokerage house. The borrowers can purchase or sell digital assets using these funds outside of their budget. In this manner, they are able to maintain their accounts as collateral. The aim of margin trading is earning profits that can cover margin costs, maintain collateral amounts, and retain surplus income for gains.
The main benefit of margin trading is bigger trading positions that increase the chances of earning profits. On the other hand, Cross-margin is another type of leveraged trading where access margin funds are moved into another margin account to maintain the collateral requirements.
In this manner, companies and professional investors can use all their available funds to balance collateral across all trading accounts.
What is an Isolated Margin?
Isolated margin means that the total amount of margin is limited to a specified quantity. Therefore, investors are able to allocate a predetermined amount of funds as collateral for a specified position. Thus, the remainder of the investment funds is not affected. Isolated margin trading offers various benefits and some risks mentioned below.
Advantages of Isolated Margin Trading
Investors can control trading risks by adding by defining the fund allocations for each trading asset or position. In this manner, the remaining assets in a trading account are safe from threat of amassing losses.
Calculating profit and loss (P&L) statements is easier and clearer for isolated margin positions. It is because the exact amount of allocated funds for every trading position is specified.
Isolated Margin trading also allows investors to contain maximum losses and enable better risk management.
Disadvantages of Isolated Margin Trading
Isolated margin trading requires constant monitoring to ensure that the fund backing a given position do not liquidate automatically.
The investors may be barred from preventing liquidation risks in case of negative market movement by allocating funds from their main reserves as a preventive measure.
Managing various isolated margin funds is difficult and requires considerable time input. Therefore, it can be difficult for beginners.
Differences Between Isolated Margin and Cross Margin Trading
Collateral and Liquidation Mechanism
For isolated margin trading only a portion of funds is set aside for a particular trade. Therefore, only the staked amount is at risk for an isolated margin position while the remaining funds remain unaffected.
In cross margin trading, all funds are staked as collateral. Therefore, if one trading positions turns bad the trading account can automatically access the entire balance to prevent liquidation. Therefore, it can lead to loss of entire balance.
Isolated margin trading enables micro risk management meaning that investors are able to manage risk exposure for individual trading positions without affecting the main fund.
On the contrary, cross margin aggregates the risks for all positions. It is profitable in case the investors have added hedging assets that can offset losses but opens the investors to greater risks.
Isolated margin trading requires individual addition of funds to positions in case of incrementing the position. In contrast, cross-margin manages the entire trading balance in an automated manner to prevent liquidation. Therefore, cross-margin is more fluid while isolated margin is a manual process.
Isolated margin is for investors who are managing risks on a per-trade basis. In this manner, the investors can prevent losses from one investment product from seeping into other investment positions.
Meanwhile, cross-margin is suitable for investors who are managing more than one trading positions and include hedging assets. At the same time, cross-margin is an automated trading process while isolated margin trading entails more active trading participation.
Isolated Margin and cross margin are two types of trading strategies that are suitable depending on individual requirements and risk management plans.