Isolated Margin is the margin balance allocated to an individual position. Isolated Margin mode allows traders to manage their risk on their individual positions by restricting the amount of margin allocated to each one. The allocated margin balance for each position can be individually adjusted.
If a trader’s position is liquidated in Isolated Margin mode, instead of their entire margin balance, only the Isolated Margin balance gets liquidated.
For example, let’s say Alice enters a long position in BTC worth 1000 USD with 10x leverage. She has a margin balance of 2000 USD but only wishes to risk a portion of that for an individual position. She sets the Isolated Margin for the position to 100 USD. If her position is liquidated, she won’t lose more than 100 USD.
The Isolated Margin amount can be adjusted for open positions. If a position in Isolated Margin mode is close to being liquidated, liquidation can be prevented by allocating additional margin to the position.
On the other hand, adjusting the margin mode associated with a position after it has already been opened is not possible. It is highly advised to check the margin mode settings before entering a position.
Another commonly used margin mode on trading platforms is Cross Margin. In Cross Margin mode, the entire margin balance is shared across open positions to avoid liquidation. If Cross Margin is enabled, the trader risks losing their entire margin balance along with any open positions in the event of a liquidation. Any realized PnL from another position can aid a losing position that is close to being liquidated.
Typically, Cross Margin is the default setting on most trading platforms, as it is the more straightforward approach suitable for novice traders. However, Isolated Margin can also be useful for more speculative positions that require strict downside limitations.