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CoinEx | Must-have Knowledge for Greenhand Traders: Isolated Margin vs. Cross Margin

2022-03-18 04:03:03

Futures traders all know that before they open a position, margins are required, which are locked in by the position. Margins fall into two categories: Initial Margin and Maintenance Margin. The former refers to the margin required to open a position, and the latter is the minimum margin required to maintain the current position.

There are two types of Margin: Isolated Margin and Cross Margin.

What Is Cross Margin mode?

Under the Cross Margin mode, all the Available Balance will be used as the Margin on your position. When the Position Margin is less than the Maintenance Margin, the Available Balance will be added to your position as Position Margin. Liquidation will be initiated when Maintenance Margin cannot be supported even after additional Available Balance has been used. In this case, the risks and benefits of all positions in the futures account will be combined, and the position will be liquidated only when the position loss exceeds the balance of the futures account.

What Is Isolated Margin mode?

Under the Isolated Margin mode, the Position Margin will be used for the current position only. In this case, it is the user, instead of the system, who manually increases the Margin. Liquidation will be initiated when the Position Margin is less than the Maintenance Margin. Therefore, under the Isolated Margin mode, the user will only lose the current Position Margin in the case of liquidation; in other words, the amount of the Position Margin is the user's worst loss, and the rest of funds in the futures account will remain unaffected.

Here is an example:

User A and User B both have 2,000 USDT in their futures account, and both take the Initial Margin of 1,000 USDT to start a position with 10x leverage to long BTC/USDT futures. The difference is that User A adopts the Isolated Margin mode while User B takes the Cross Margin mode:

Assuming that the BTC price falls to the Liquidation Price, User A loses the margin of 1,000 USDT and his position is liquidated. So he still has 1,000 USDT left in his futures account. In the case of User B who takes the Cross Margin mode, after losing the margin of 1,000 USDT, more margin is added automatically to keep the long position. If the BTC price rebounds, User B may start making profits, but if the price keeps falling, he may lose all of 2,000 USDT in his futures account.

In general, the Cross Margin mode is superior in the ability to resist losses and the convenience of operation and position calculation. Although liquidation is less likely under this mode with low leverage and under volatile market conditions, Cross Margin may make all assets in the account evaporate in the case of black swan incidents or force majeure that fails trades.

Under the Isolated Margin mode, users are required to add Margin manually and strictly control the gap between the Liquidation Price and the Mark Price; otherwise, a single position is prone to liquidation and losses.

In CoinEx futures trading, users generally choose the Cross Margin mode by default. The leverage can be adjusted in both modes to 100x at most. It is worth noting that when the user has an order outstanding, he cannot switch between the two modes or change the leverage.

How to Calculate the Margin?

The formula below is for your reference:

Position Margin=Open Value/Leverage (Initial Margin) + Increased Margin - Decreased Margin + Unrealized PNL

In addition, the Bankruptcy Risk is calculated based on the Position Margin and the Maintenance Margin required for the current position. The larger the value, the higher the risk. When the risk reaches 70%, CoinEx will issue a Contract Liquidation Notice, and liquidation will be triggered when the risk exceeds 100%.

Bankruptcy Risk under the Isolated Margin mode=Maintenance Margin/Position Margin * 100%

Bankruptcy Risk under the Cross Margin mode=Maintenance Margin/(Available Balance + Position Margin) * 100%

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