Margin trading lets crypto traders amplify their positions by borrowing funds, offering the potential for greater profits and higher risks. Two key margin types — isolated and cross-margin — help manage these risks. An isolated margin limits exposure to individual trades, while cross margin spreads risk across all positions. Knowing when and how to use each is essential for successful trading.
Currently, CVEX offers cross margin trading with advanced risk management tools, and isolated margin will soon be available, giving traders more flexibility and control over their strategies.
Margin trading in cryptocurrency allows traders to borrow funds to increase their buying power, enabling them to control larger positions with less capital. This type of trading is especially popular in volatile markets like crypto, where traders aim to maximise returns on smaller price movements.
In margin trading, key terms include:
Margin — The amount of funds required to open a leveraged position.
Leverage — The ratio of borrowed funds to the trader’s capital, which amplifies both potential profits and losses.
Initial Margin — The minimum amount of capital required to open a leveraged position.
Maintenance Margin — The minimum balance that must be maintained to keep the position open. If the account balance falls below this, the position risks liquidation.
For example, with 5:1 leverage, a trader with $1,000 can control $5,000 worth of assets. If the market moves favourably, they can magnify their profits. However, if the market moves against them, losses are also amplified, and the trader may lose their initial investment or more.
Isolated margin is a trading strategy in which the funds allocated as collateral are tied specifically to individual positions. This means that if a position moves unfavourably, only the margin dedicated to that specific trade is at risk without affecting the rest of your account balance.
Advantages of Isolated Margin
Only the allocated funds for that specific position are at risk, helping traders manage losses effectively.
It’s easier to track the performance of individual trades since each position has its own separate margin.
Even in the worst-case scenario, you can predict and limit the maximum loss to the amount of collateral dedicated to that position.
Disadvantages of Isolated Margin
Traders must keep a close eye on their positions. If the market moves against them, they may need to manually add more margin to avoid liquidation.
Unlike cross margin, you can’t use other funds in your account to support a position that is close to liquidation. This means that traders need to be more hands-on with their margin management.
Note for CVEX Users:
Currently, isolated margin is unavailable at CVEX, but we are working on implementing it in future updates to offer more trading flexibility and risk management options for our users.
Cross margin is a margin trading system where all available funds in your account are shared across all open positions. Instead of allocating a specific amount of collateral to individual trades, cross-margin uses your total account balance to support any position that might need extra margin to avoid liquidation.
Advantages of Cross Margin
Cross margin automatically draws from your available funds to cover potential losses on any open position, helping prevent premature liquidation.
Since all positions share the same margin, profits from one position can cover losses in another, making it ideal for traders with multiple active positions.
Traders can manage multiple positions simultaneously, offsetting losses from one trade with gains from another, especially useful in hedging scenarios.
Disadvantages of Cross Margin
While cross margin helps in reducing individual position liquidation, it puts your entire account balance at risk. If several trades move against you, your entire balance could be wiped out.
Since all positions draw from the same margin pool, it’s harder to manage risk on a trade-by-trade basis. This lack of control can make it difficult to maintain specific risk-reward strategies for each position.
Let’s proceed with an example. Imagine you have 10 BTC in your account and are using cross margin to open two trades: a long position on Ethereum (ETH) and a short position on another crypto asset, Z. If ETH price drops, your long position on ETH might start losing, but if Z also drops, your short position on Z can generate a profit. The profit from the Z trade could then be used to cover the margin requirements of the losing ETH trade, helping you maintain both positions for longer without facing immediate liquidation.
When comparing isolated and cross-margin, it’s important to understand how they handle collateral, liquidation, and risk management.
In an isolated margin, only the funds you allocate to a specific position are at risk. If the trade moves against you, the loss is limited to the amount of margin you’ve set aside for that position, leaving the rest of your account untouched. For instance, if you allocate 2 BTC to an isolated trade and it loses, you only lose those 2 BTC, not your entire account balance.
Cross margin, on the other hand, uses all your available funds as collateral for all open trades. If one position starts losing, the system will pull from your entire balance to cover potential losses, which can prevent liquidation. While this can be helpful in keeping positions open longer, if multiple trades go against you, you could lose your entire balance.
Risk management is also different between the two. Isolated margin gives you more control over individual trades since you can limit how much of your capital is exposed. Each trade is managed separately, so a loss on one won’t affect the rest of your account. This makes it easier to manage risk on a trade-by-trade basis. Cross margin, however, allows for more flexibility when managing multiple trades. Profits from one position can offset losses in another, which is particularly useful for hedging strategies. But since all trades share the same pool of collateral, there’s a higher overall risk if the market moves sharply against you.
In terms of flexibility and use cases, an isolated margin is ideal for traders who want more control over their risk per trade. It works best for high-conviction trades where you want to limit your exposure. Cross margin is better suited for traders managing multiple positions or running hedging strategies, as it leverages the entire account balance for capital efficiency. While cross-margin offers more flexibility, it requires careful risk management since the combined risk of all trades could lead to larger losses. Understanding these differences can help traders choose the margin type that best fits their strategy and risk tolerance.
At CVEX, the cross-margin is designed to give traders flexibility while managing risk effectively. Our cross-margin system allows you to use all available funds in your account to support multiple open trades, helping to prevent liquidation by automatically pulling from your balance when needed.
CVEX offers a user-friendly interface and tools that make it easy to monitor your positions and manage your cross-margin trading efficiently. One of the key risk management features is our Value-at-Risk (VaR) model. The VaR system consolidates all trading exposures into a single, dynamic metric, adjusting collateral requirements based on current market conditions. This ensures that margin trading remains safe and that risks are minimised even in volatile markets.
