Basic Concepts
Isolated margin
In Isolated Margin mode, a fixed margin is locked when you place the order, which is the maximum loss of the position. When the volatility is high, thus the position is forced to liquidate, the isolated margin will not be changed and the maximum loss will be controlled within the fixed range.
In Isolated mode, users can enable Hedge Mode, which means short positions are calculated independently of the risk of long positions. Each contract's position will have its margin and profits calculated independently.
The advantages of Isolated Margin: the user will only lose the fixed margin (the maximum loss) of the position if the position is liquidated, and will not affect other funds in the account for that contract.
Cross margin
In Cross Margin Mode, all equity in your futures account can be used as margin for the position, so that it is more risk resistant, and sufficient funds can ensure that the account will not be forced to liquidate. As all your equity could be margined, in case of huge price fluctuations, the losses caused can be even greater. All equity transferred by the investor to the futures account and all PnLs generated by the position will be used as margin for the position in the contract.
In Cross Margin Mode, the PnLs of all positions held in the account will be combined and the position will only be liquidated when the loss exceeds the account equity.
The advantages of Cross Margin: the account has a high loss carrying capacity and is easy to operate and calculate positions, so it is often used for hedging and quantitative trading.
Comparison
Cross margin mode is relatively less likely to liquidate under low leverage and oscillating market, but when encountering market events, or some uncontrollable factors that cannot be traded, it is likely to cause all the funds in the futures account to go to zero. Isolated margin mode is more flexible than the Cross margin mode, but it requires strict control of the price gap between the liquidated price and the marked price, otherwise individual positions can easily be liquidated and cause losses.
Example
A and B are both long the BTC/USDT contract with nominal value of $2000 and 10x leverage.
A and B used $1000 as the margin under isolated margin mode and corss margin mode respectively.
Assuming the liquidated price of A is $8000, and B's is $7000:
If BTC suddenly falls to $8,000, A's position is liquidated and loses the $1000 margin, with $1000 left.
However, as B is in cross margin mode, the position is still held after losing $1000. Either profit or loss of the $2000 equity, if the price goes up or keeps falling.
Formula of Margin
Isolated Margin
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Initial Margin = Contract Size*|Number of Contracts|* Average Price of Open Positions / Leverage
Cross Margin
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Initial Margin = Contract Size*|Number of Contracts|*Mark Price / Leverage
Formula of Margin Rate
Margin rate = (Equity + ∑Profit)/ ∑(Maintenace Margin+Trading Fee)
Margin rate = (Margin + ∑Profit)/ ∑(Maintenace Margin+Trading Fee)