Must-read for Contract Trading: How to Choose Between Isolated and Cross Margin Modes?

Two Core Concepts of Margin

Before opening a contract trading position, it is essential to understand what margin is. Simply put, margin is the funds that must be locked in when opening a position, divided into two categories: Initial Margin is the amount you need to invest when opening a position, and Maintenance Margin is the minimum level of funds required to keep the position open. When the position’s loss approaches the maintenance margin, the system will respond differently depending on the margin mode you choose.

Isolated Margin Mode: Independent Risk Management

The logic of isolated margin mode is straightforward — each position is independent. The margin set for a particular position only applies to that position; unless you actively add funds, the system will not automatically top up. If the margin for that position falls below the maintenance margin level, the system will execute a liquidation, and the margin for that position will be lost.

However, this also means that your maximum loss is limited to the initial margin of that position. Other positions and account balances are unaffected.

Cross Margin Mode: Linked Leverage Effect

Cross margin mode is different. All available funds in your contract account can serve as backup margin. When a position incurs a loss, the system will automatically draw from your available balance to top up the position, allowing it to continue holding.

This presents a double-edged sword: in volatile markets, cross margin mode has stronger loss resistance, and positions are less likely to be liquidated. But if a sudden drop or other major market shocks occur, you could lose all funds in your entire contract account at once.

Practical Case Comparison

Suppose you and your friend Xiao Wang each have a contract account with 2000U, and both use 1000U with 10x leverage to go long on BTC. The difference is that you choose isolated margin, while Xiao Wang chooses cross margin.

When BTC price drops to the liquidation price, you lose the 1000U margin of your position and get liquidated, but you still have 1000U in your account balance, for a total loss of 1000U. Xiao Wang’s system automatically tops up from the remaining 1000U, and the long position continues to hold. If BTC rebounds at this point, Xiao Wang might turn losses into gains; but if BTC continues to fall, he could lose the entire 2000U.

Mathematical Logic of Risk Calculation

Understanding how liquidation risk is calculated helps in making smarter choices. The key indicator here is the Liquidation Risk Rate:

Isolated Margin Liquidation Risk = Maintenance Margin / Position Margin × 100%

Cross Margin Liquidation Risk = Maintenance Margin / (Available Balance + Position Margin) × 100%

When the liquidation risk exceeds 100%, liquidation will be triggered. Compared to the simpler and more transparent calculation of isolated margin risk, cross margin appears to have a lower risk rate because of the support of additional funds, but it also hides the risk of the entire account being wiped out.

Complete Calculation of Position Margin

If you want to precisely understand your position status, you can use this formula:

Position Margin = (Position Value / Leverage) + Additional Margin - Reduced Margin + Unrealized Profit and Loss

How to Choose? Isolated Margin or Cross Margin

Choosing cross margin mode is suitable for:

• Traders with higher risk tolerance
• Those who want to operate more positions with less capital
• Traders accustomed to lower leverage and conservative strategies
• Those seeking better loss resistance to handle small fluctuations

But note that in extreme black swan events, cross margin mode can potentially wipe out the entire account.

Choosing isolated margin mode is suitable for:

• Traders who want precise control over each position’s risk
• Those willing to manually manage margin and risk
• Traders who want to isolate risks across different positions
• Those who prefer strict stop-loss strategies

Isolated margin requires vigilance regarding the distance between the liquidation price and the current price. Once a position approaches the liquidation line, active decisions are needed whether to add margin or to stop loss.

Operational Precautions

On most trading platforms, leverage can be freely adjusted in both cross and isolated margin modes, often supporting up to 100x leverage. However, there is a detail to note: When you place an unfilled order, the system will lock your margin mode and leverage settings, preventing switching or modification, to avoid risk calculation confusion when the order executes.

In summary, both isolated and cross margin modes have their advantages. The core depends on your attitude towards risk and your trading style.