Isolated margin mode is an effective tool to have in your crypto trading arsenal. Find out what this term means below!
What Is An Isolated Margin?
The isolated margin mode enables crypto traders to adjust and restrict the amount of margin balance allocated to each of their individual positions, which enables more effective risk management.
What You Need To Know About An Isolated Margin
If we put the isolated margin definition in simple terms, a trader using this mode can open multiple positions, each with its own margin requirement, instead of using the same margin for all positions. Thus, in the event of a liquidation, the trader’s available balance won’t be used in full to add margin to their position.
The isolated margin amount can be tweaked for open positions. Thus, a position’s liquidation in isolated margin mode can be prevented by allocating additional margin to it. However, it’s impossible to adjust the margin mode type after opening a position, so check the settings beforehand.
Another commonly used margin mode that shouldn’t be confused with an isolated margin is a cross margin. This method uses the full amount of funds in a trader’s available balance of a given cryptocurrency to avoid liquidations on positions with the same settlement crypto.
Let’s imagine that a trader has a position of 100 BTC worth $1,000. They select the isolated margin mode and post 4 BTC worth of initial margin, with a liquidation price set to $970. This means that their margin balance is now 96 BTC.
Then, the price falls to $940, and during the drop, the liquidation engine assumes control of the trader’s position at their liquidation price of $970. In this scenario, the trader only loses the 4 BTC they assigned through an isolated margin but has their position liquidated.
As a result, no additional funds would be used to avoid liquidation due to an isolated margin. If the trader used a cross margin, they would have had a larger unrealized loss of 6 BTC but would have prevented the position from being liquidated.
