Margin trading is a trading strategy that lets you borrow funds from an exchange like 火幣全球 to open positions larger than your account balance. While it is regarded as a risky trading method, it has become massively popular as it offers a way to make significant profits with less capital.
But before opening your first margin trade, you must understand what a margin is, as well as the difference between a cross margin and an isolated margin, to minimize the risk of catastrophic losses. After this lesson, you can continue your trading journey safely and concentrate on making profits.
Introduction to margin trading
The word ‘margin’ refers to the number of available tokens you must have to open a leveraged position and keep it open. For example, if you want to open a 5,000 USD position with 5:1 leverage, you must deposit 1,000 USD, which will function as the margin. Anything over your initial investment is considered a loan from the exchange.
The margin functions as collateral while the position is open, and if the position no longer fulfills margin requirements, the exchange may liquidate it. Therefore, always keep a close eye on the metrics shown on the Huobi Global trading interface. The lower the margin ratio, the higher the risk. Be especially careful with the margin ratio because if it falls to 0, forced liquidation will be triggered.
As users have varying trading strategies, Huobi Global employs two different methods of margin trading: cross margin and isolated margin.
All positions share the same margin in cross margin (also called ‘spread margin’) trading. So, if one of your positions is running out of margin, it will tap into the margin from your total account balance and other positions to avoid liquidation. Do note that while you may avoid liquidation thanks to the profit of another position, your entire account balance is at risk as all its assets and positions are functioning as collateral.
If the margin risk level reaches liquidation point (arrow in red), the exchange will liquidate all your open positions to cover debts, interests and other fees.
The cross margin is more suitable for long-term trading strategies. It is especially beneficial in times of extreme fluctuation, as it averages risk among all positions and minimizes liquidation risk.
With an isolated margin, you must assign individual margins to different trading pairs. In doing so, you limit the risk of losing your entire margin balance and your open positions being liquidated.
If the market goes against your isolated margin position and the margin risk level reaches liquidation point, only the trading pair you are trading at that moment will be liquidated. For example, if you take a loan to trade a BTC/USDT pair and experience liquidation, your other positions and account balance will be unaffected.
The isolated margin is more suitable for short-term trading strategies. For example, it might be handy when entering a very speculative position, as it limits your losses to only the initial invested margin. This ensures you do not lose all your balances in a speculative trade where the price goes in the wrong direction.
Do the cross margin and isolated margin share the same wallets?
The cross margin and isolated margin do not share the same wallets, so you need to transfer funds to each wallet separately.
If you transfer funds to a cross margin wallet, these funds will automatically function as collateral for all positions. Therefore, you can open any position, like BTC/USDT or ETH/USDT, and they will have the same total balance against liquidation.
Transferring funds to an isolated margin wallet is a little different, as you must always select a specific trading pair before transferring the initial collateral. For example, a BTC/USDT pair would have a separate isolated margin wallet from ETH/USDT. As such, if you transfer 1,000 USDT to an ETH/USDT isolated margin wallet, you can use that 1,000 USDT oto borrow against and trade only an ETH/USDT pair.
Choosing the correct cross margin and isolated margin trading pairs on Huobi Global
You can switch from between a cross margin and isolated margin by choosing the correct trading pair. Cross margin and isolated margin trading pairs are categorized separately; you can easily choose the right trading pair by following these steps:
1. On the Huobi Global trading interface, click on ‘Cross’ or ‘Isolated’, depending on which margin you want to use.
2. After making your selection, choose from the USDT, HUSD and BTC trading classes, then select the the trading pair you want. The image below illustrates the BTC/HUSD pair in an isolated margin.
Always remember to use risk management strategies and protection tools, such as stop-limit orders, to protect your investments when the market does not go your way.