Isolated margin mode allows users to isolate the margin that their position uses so they can limit their potential liability to that initial margin set.
This mode is useful for traders who want to take speculative positions, and where there is a probable chance of their speculation turning out to be incorrect. In such a situation, the user will be better protected as compared to cross-margin mode because only their isolated margin balance will face liquidation, instead of their entire margin balance. The downside of using isolated margin is that your exposure will be limited to one position in a particular market.
As an example, let’s say Ben enters a short position in ETH worth $2000 with 5x leverage. His entire margin balance is equivalent to $2000 but Ben is only willing to risk $500 for this particular position as the conditions of the market are volatile and there is uncertainty on the direction ETH will take. Ben sets the isolated margin for this position to $500. If the price of ETH takes an unexpected turn upwards and Ben is liquidated, he will lose a maximum of $500 for this particular position.
When it comes to users who keep diverse portfolios consisting of positions with varying levels of risk, isolated margin is also particularly useful. Unlike using cross-margin mode which spreads a users’ full funds across their different positions, isolated margin mode will prevent the risk of liquidation across many positions. This is made possible due to independent margins (or separate wallets being created) for each position.
Platforms typically allow users to adjust the margin allocated for each of their positions, as well as adjust margins on an ongoing basis.
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