Isolated Margin

In Isolated Margin, a trader allocates a fixed amount of capital as collateral for a single position. The maximum possible loss is strictly limited to this allocated amount, preventing losses from spilling over to the trader's entire account balance or other open positions. This creates a clear, bounded risk parameter for each trade.

Each isolated position has its own Maintenance Margin requirement and Liquidation Price. If the position's losses erode the allocated collateral to the maintenance level, only that specific position is liquidated. This isolates the liquidation event, protecting the trader's other capital and positions from being automatically closed to cover the loss.

This mode is ideal for complex strategies like hedging. A trader can open opposing long and short positions in different markets (e.g., BTC perpetual and ETH perpetual) using separate, isolated margin pools. This allows them to manage risk on one asset without the profits from the hedge being used as collateral for the losing position, a scenario that can occur in Cross Margin.

Traders must actively manage collateral for each position. To avoid liquidation, they can add margin to the specific isolated position. Conversely, they cannot withdraw collateral from a live isolated position without closing it or reducing the position size, as the allocated capital is locked as collateral for that trade.

The core alternative is Cross Margin, where all account equity is shared as collateral across all open positions. Key differences:

• Risk: Isolated contains risk; Cross shares risk pool.
• Liquidation: Isolated loses one position; Cross can liquidate multiple positions.
• Use Case: Isolated for defined-risk trades; Cross for portfolio-level margin efficiency.

Isolated Margin is commonly used for:

• High-Leverage Speculation: Limiting downside on a volatile trade.
• New Strategy Testing: Deploying a fixed amount of capital to test a new trading idea.
• Event-Driven Trades: Taking a position around a scheduled news event with predefined risk.
• Managing Uncorrelated Assets: Trading pairs where price movements are independent, requiring separate risk silos.

Traders use isolated margin to take on high-leverage positions (e.g., 10x-100x) on a specific asset pair. The collateral is ring-fenced, meaning a total loss on this position only forfeits the allocated margin, protecting the rest of the portfolio. This is common for short-term directional bets on volatile altcoins or major market events.

An investor holding a long-term portfolio can use an isolated margin position to open a short position against a correlated asset. For example, shorting an ETF futures contract while holding the underlying stocks. The isolated margin limits the capital at risk for the hedge, preventing the maintenance requirements of the short from affecting the core holdings.

Developers and quantitative traders deploy new algorithms using isolated margin accounts. By funding a small, defined amount of capital, they can live-test strategies with real leverage and slippage without risking their entire balance. A strategy failure results in the loss of only the isolated collateral, providing a clear risk/reward parameter for backtesting validation.

Isolated margin is the standard mode for many perpetual futures contracts on exchanges like Binance and Bybit. Traders post margin for a single perpetual swap position. This allows precise control over liquidation price, which is calculated based solely on the isolated collateral and position size, making risk easier to model than in cross-margin.

Arbitrageurs employ isolated margin to fund low-risk, high-frequency trades between markets. For a triangular arbitrage opportunity spotted across spot and futures, they can allocate a precise amount of capital via isolated margin to execute the trade sequence. This limits liability to that specific trade cycle and prevents a failure in one leg from draining funds reserved for other concurrent opportunities.

In DeFi protocols, liquidity providers (LPs) on lending platforms or perpetual DEXs can use isolated margin pools. An LP can supply assets to a specific, high-risk market (e.g., a new altcoin pair) without exposing their entire liquidity portfolio to its impermanent loss or default risk. Losses are contained to the assets committed to that isolated pool.

A contrasting risk model where a user's entire portfolio of assets is used as collateral for all open positions. This provides higher capital efficiency but exposes all assets to liquidation if any single position fails. It is the default mode on many centralized exchanges.

The automated process of forcibly closing a leveraged position when its collateral value falls below a maintenance margin requirement. For isolated margin, this process only affects the specific, isolated collateral pool, protecting the user's other assets from being seized.

The minimum percentage of collateral value that must be maintained relative to a loan or position's size. If the loan-to-value (LTV) ratio exceeds this threshold due to market moves, the position becomes eligible for liquidation. This is a critical parameter in isolated margin systems.

Also known as the Loan-to-Value (LTV) ratio, this is the maximum percentage of an asset's value that can be borrowed against. For example, a collateral factor of 75% for ETH means you can borrow up to $0.75 for every $1 of ETH deposited. It is a key determinant of borrowing power and risk.

A numerical representation of a position's safety from liquidation. It is calculated as (Collateral Value * Liquidation Threshold) / Total Borrowed Value. A health factor below 1.0 triggers liquidation. In isolated margin, this factor is calculated per isolated position.

A warning or requirement (common in traditional finance) for a trader to add more collateral to a leveraged position. In most decentralized finance (DeFi) protocols, this process is fully automated and instant, leading directly to liquidation without a manual warning period.