Cross Margin Definition
Cross margin, also known as spread margin, is a risk management approach used in trading that utilizes all the available balance in a trader’s account to keep a position open in the event of a margin call. Unlike isolated margin, where the amount at risk is predetermined, cross margin taps into the full balance which can lead to higher losses.
Cross Margin Key Points
- Cross margin uses all available balance to keep a position open during a margin call.
- It serves as a risk management tool in trading.
- In comparison to isolated margin, it can lead to higher losses as the amount at risk isn’t capped.
- It’s useful in scenarios where a trader has a good understanding of market behavior and expects the price to move in their favor after a brief setback.
What is Cross Margin?
Cross margin is a tool for managing risk in trading, particularly in cryptocurrency markets that tend to be volatile. It uses the total available balance in a trader’s account to maintain open positions if their trade goes against them, leading to a margin call. Essentially, as long as there is available balance, the position will remain open.
Why use Cross Margin?
Traders use cross margin as it gives them greater flexibility in managing their trades. It can be particularly useful in scenarios where a trader has confidence in the overall direction of the market, despite short-term fluctuations against their position. By using cross margin, traders can weather small market downturns without their position getting closed prematurely.
When to use Cross Margin?
Cross margin is ideal for experienced traders who have a deep understanding of market behaviors and are confident in their trading strategy. It should be used when a trader anticipates that a market reversal is temporary and expects the price to eventually return to their favour.
How does Cross Margin work?
When a trader selects cross margin, all of their available balance is used to prevent their open trades from closing in the event of a margin call. Put simply, instead of allocating a specific amount of funds to a trade as in isolated margin, cross margin uses the total balance. This provides the necessary leverage for the trader to keep the position open far longer, but this approach also increases the risk of larger losses.
Cross Margin vs Isolated Margin
The difference between cross margin and isolated margin lies in how much of a trader’s balance is at risk. In cross margin, all of a trader’s available balance can be used to keep a trade open, potentially leading to significant losses. In isolated margin, only a specified amount is at risk, limiting potential losses but also potentially closing the position prematurely in volatile markets.
