Overbit allows traders to use two different margin allocation modes (Isolated Margin or Cross Margin) for each position that is opened. This helps traders with better risk management. This guide will help explain the difference between both Isolated and Cross margin modes.

What is Isolated Margin?

When a trader places an isolated margin trade, the initial margin used to open the position is kept separate from the available balance and other open positions. 

In an isolated margin position, the position is automatically liquidated if the initial margin falls below the maintenance margin.

The isolated margin option is useful when opening speculative positions as the maximum amount a trader will lose is limited to the initial margin placed and does not tap into a trader’s available funds. 

By opening isolated margin trades, traders have more control over managing individual positions as compared to the cross margin method. On the other hand, an isolated margin position with high leverage can be automatically liquidated, even with a slight movement in an asset price. 

Example Isolated Margin Position

Let’s say the Bitcoin (BTC) price is $10,000 USD. A trader has 0.1 BTC in his Overbit account and decides to open a LONG (BUY) isolated margin position on BTC/USD for 1 BTC with 100X leverage. 

His initial margin requirement is 1% of 1 BTC, which means he will need to stake 0.01 BTC as initial margin to open this isolated margin position.  

Please note the above example is meant to highlight how liquidation occurs in an isolated margin position and does not reflect other fees involved, such as trading fees and funding fees. 

The trader is required to maintain a margin balance of 0.005 BTC as maintenance margin, given that Overbit’s maintenance margin for BTC/USD is 0.5% of the opening trade value.

Let’s say the price of Bitcoin declined to $9,950 USD. At the same time, the trader’s margin balance drops to 0.005 BTC, which is now at the maintenance margin. At any further decline, the position is automatically liquidated because the isolated margin option does not tap into the trader’s account balance, which has an additional 0.09 BTC in available funds. 

Hence, the trader only risks losing his initial margin of 0.01 BTC and his account balance remains intact. 

What is Cross Margin?

A cross margin position taps into all available funds in a trader’s account balance. Please note, any unrealised profits from other open positions are not counted towards available funds.

The cross margin position is liquidated once the trader’s available account balance falls below the maintenance margin. 

Opening a cross margin position is useful when traders are looking to minimise the risk of liquidation by staking their account balance as added margin. 

On the other hand, using the cross margin mode offers traders less control over managing their funds. 

Example Cross Margin Position

Let’s say the Bitcoin (BTC) price is $10,000 USD. A trader has 0.1 BTC in his Overbit account and decides to open a LONG (BUY) cross margin position on BTC/USD for 1 BTC.

His initial margin requirement is 1% of 1 BTC, as the initial margin is calculated using the maximum leverage allowed for the trading pair under cross margin mode. This means that he will need to stake 0.01 BTC as the initial margin to open this cross margin position. 

Please note the above example is meant to highlight how liquidation occurs in a cross margin position and does not reflect other fees involved, such as trading fees and funding fees. 

The trader is required to maintain a margin balance of 0.005 BTC as maintenance margin, given that Overbit’s maintenance margin for BTC/USD is 0.5% of the opening trade value.

Let’s say the price of Bitcoin declined to $9,950 USD. At the same time, the trader’s initial margin drops to 0.005 BTC, which is now at the maintenance margin. However, the position would only be liquidated if the price of Bitcoin further declined below $9,850 USD. This is because using cross margin mode taps into the trader’s remaining account balance of 0.09 BTC as added margin. 

Hence, the trader can utilise his available funds to avoid liquidation with cross margin mode. However, he risks losing his entire account balance, in the event of a huge decline in the asset price.

Choosing Between Cross and Isolated Margin Modes

When opening a position on Overbit, the leverage slider has been intuitively designed to help you quickly choose the margin mode and amount of margin.

The above screenshot shows an account balance of 6.59 BTC. If a trader wants to buy 10 BTC using Cross Margin mode, the funds required are 0.11499 BTC. To do this, move the slider all the way to the left or click on the CROSS text. The liquidation price is $5,264.88. That's the BTC price at which your account will get liquidated and you will lose your funds. If you open more positions (cross or isolated) the liquidation price for this trade will go up, as you will be sharing the available funds with multiple open positions.

In the above illustration, 100X leverage has been chosen in Isolated Margin mode. To do this, move the slider to the right, or click on a number. Notice how the funds required are approximately the same, but the liquidation price is now $8,665.75. That means the BTC price only needs to go down by $43.33 for this position to be liquidated. My absolute loss would be the 0.11499 BTC.

Adding More Margin

After opening an isolated margin position, traders may wish to add more margin to an existing position.

In the Positions tab, you will notice in the margin column, the margin amount can be clicked for more options.

This edit margin window allows you to add more margin to an isolated margin position from your available balance, should you wish. Therefore, you would be reducing the amount of a leverage that an isolated position is using.

Final Thoughts

Traders should consider whether to use isolated margin or cross margin, depending on how speculative the position is. 

It is useful to open speculative positions using isolated margin as it gives a trader more control over the trade. The trader is able to adjust the initial margin requirement for the position and limit maximum loss to that amount. On the flip side, traders should be mindful that a slight movement in asset value can trigger liquidation, especially with high leverage. 

Opening a cross margin position may be advantageous if the trader’s goal is to avoid liquidation. The cons of using cross margin mode is the inability to limit the maximum loss and risking one’s entire account balance in the event of a bad trade. Therefore, it is essential that a trader sets a Stop Loss order when opening a cross or isolated margin position. 

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