Understanding Isolated Margin Mode
In Isolated Margin Mode, each order operates independently.
When a single order's principal (or margin) loses enough value to reach its estimated liquidation price, it will be forcibly liquidated.
What Is Liquidation?
In futures trading, liquidation is an event all traders strive to avoid. In cryptocurrency futures trading, losing positions are forcibly closed to prevent a trader's equity from falling into negative territory. Leveraged positions are particularly vulnerable to sharp price fluctuations, which can rapidly deplete a trader's equity. In such scenarios, losses may exceed the maintenance margin. As a result, losing positions are liquidated automatically and involuntarily once specific price conditions are met.
Liquidation can occur gradually or instantaneously, largely depending on the leverage used. For example, lower leverage makes liquidation less likely during minor market corrections. Conversely, high leverage can quickly wipe out a trader's initial investment.
When Does Liquidation Occur?
Liquidation happens when a trader fails to meet the margin requirements for their leveraged position.
Example:
If you allocate 100 USDT to open a BTC/USDT long position with 20x leverage, your position's value becomes 2,000 USDT. If Bitcoin's price drops by 5%, your initial 100 USDT margin is entirely lost. If you cannot meet a margin call to sustain the trade, your position faces liquidation risk.
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Frequently Asked Questions (FAQs)
1. How does Isolated Margin differ from Cross Margin?
Isolated Margin restricts risk to the margin of a single order, whereas Cross Margin uses your entire account balance to prevent liquidation across positions.
2. Can I adjust leverage after entering Isolated Margin Mode?
Yes, most platforms allow leverage adjustments, but this may affect your liquidation price.
3. What happens if my position is liquidated?
You lose the margin allocated to that position, but other orders remain unaffected in Isolated Margin Mode.
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4. How is the liquidation price calculated?
It depends on leverage, position size, and market volatility. Higher leverage raises liquidation risks.
5. Is Isolated Margin safer for beginners?
Yes, it limits losses per trade, making it preferable for risk management.
Key Terms: Isolated Margin, Liquidation, Leverage, Futures Trading, Risk Management