The concepts of cross margin and isolated margin are important for risk management and strategy execution in trading. Understanding the difference between them will help you be more flexible, make more profits and avoid unnecessary losses.
Both cross margin and isolated margin describe the relationships between separate positions and trading account balance.
Cross Margin is when positions offset each other so that the excess margin of one position can be used to satisfy the margin requirements of another position. Margin on all these positions combined is backed by the entire balance of funds on a trading account.
In other words, with cross margin, if certain positions are losing, their margin will be maintained out of the profits generated by other positions as well as the balance of funds on the trading account.
This setup helps certain less successful positions to outlive the times when the price moves against them without being liquidated.
Isolated Margin is when the margin of a certain position (group of positions) is not used to satisfy the margin requirements of another position (group of positions). Margins are separate and margin requirements are maintained separately.
So the excess margin created by profitable positions or the available balance elsewhere will not be automatically backing the losing positions.
Isolated margin helps to localize and limit the losses. The profits of the successful positions and balances will not be affected in the event of liquidation of another position with isolated margin.
How Cross Margin and Isolated Margin works in CEX.IO Broker
CEX.IO Broker offers both cross margin and isolated margin to traders. Unlike in many other margin trading platforms, where a trader needs to choose between cross margin or isolated margin for a position, CEX.IO Broker allows a trader to have both.
You can create multiple trading accounts in CEX.IO Broker. Within one trading account, it is always cross margin. Between the trading accounts, it is always an isolated margin.
In practice, it means the trades within one trading account share the responsibility of maintaining the Margin Level above 25% (the liquidation level). If between all profitable and money-losing positions on one trading account, the Margin Level is above 25%, all positions avoid liquidation, even if some of them are not performing well at the moment.
Important distinction from other platforms is that even unrealized profit (FPL) of successful positions helps maintain the margin requirements in cross margin. While in other platforms you need to close a position for its profit to be used to satisfy margin requirements of other positions, in CEX.IO Broker, unrealized profit is added to Equity. Equity, in turn, is used to calculate Margin Level, a metric you need to maintain.
Isolated margin between separate trading accounts means that, if a liquidation happens on one trading account, it will not affect the other trading account. So the losses are contained.
The use of cross margin in trading accounts and isolated margin between trading accounts in CEX.IO Broker allows you to experiment with various trading strategies and control risks.
For example, you can have separate trading accounts to do the following:
- Separate intraday trades from longer duration trades;
- Separate bigger size trades from small ones;
- Separate high risk strategy from a proven one;
- Separate BTC trades from ETH trades;
… and so forth.
Since inside one trading account positions share the same strategy, it is reasonable for them to also share margin requirement responsibility as well. Between trading accounts with different strategies the margins are separate and risks compartmentalized.
You can read how cross and isolated margin work in CEX.IO Broker in greater detail here: https://blog.cex.io/cex-io-broker/cross-margin-and-isolated-margin-20990
To start taking advantage of cross margin and isolated margin in your trading, create a second trading account as shown below, and you are all set!