Isolated Margin Mode for Perpetual Contracts

I. Basic Concept

The isolated margin mode for perpetual contracts is a digital currency contract trading mechanism where investors allocate fixed margin for each position separately. The profit and loss of each position are only related to the allocated margin, isolated from other funds in the account. Its core feature is that risks are confined to a single position without affecting other funds in the account, contrasting with the "cross margin mode" (using all account funds as margin).

II. Operational Mechanism

1. Independent Margin Allocation

   • Investors must set the margin amount for each contract position individually, and these funds are locked and cannot be used for other positions.

   • Example: If an account has 1,000 USDT and allocates 200 USDT as isolated margin for a Bitcoin perpetual contract, the position only bears risks with the 200 USDT, while the remaining 800 USDT remain unaffected.

2. Risk and P&L Calculation

   • Risk ceiling: In isolated margin mode, the maximum loss in case of liquidation is the margin of the position (excluding position piercing).

   • P&L example: Going long on Bitcoin with 5x leverage and 200 USDT margin. If the Bitcoin price drops by 20%, the margin is wiped out, triggering liquidation, while the other 800 USDT in the account remain intact.

III. Core Features and Advantages

Feature	Detailed Explanation	Advantage
Risk Isolation	Losses from a single position do not affect other account funds, avoiding "domino losses".	Suitable for diversified investments, protecting principal, especially for novices to control risks.
Flexible Margin Management	Adjust single-position margin based on the volatility of different currencies (e.g., allocate higher margin for Bitcoin and lower for small-cap coins).	Optimizes capital utilization and customizes strategies for assets with different risk levels.
Clear Liquidation Threshold	Each position independently calculates the maintenance margin (typically 1%-5% of the position value) with clear triggering conditions.	Facilitates controlling liquidation risks by setting margin ratios, reducing unexpected losses.

IV. Liquidation Trigger Conditions and Cases

1. Trigger Logic

   • Forced liquidation is triggered when the "margin ratio" of a position falls below the maintenance margin ratio set by the trading platform.

   • Margin ratio formula: (Account Equity + Unrealized P&L) / Position Value × 100%. If it is lower than the maintenance margin ratio (e.g., 1%), liquidation occurs.

2. Practical Case

   • An investor shorts 1,000 USDT worth of Ethereum (ETH) with 100 USDT margin and 10x leverage, with a maintenance margin ratio of 1%.

   • If the ETH price rises by 10%, the position loses 100 USDT, the margin is exhausted, liquidation is triggered, and other account funds remain unaffected.

V. Application Scenarios and Strategy Recommendations

• Application Scenarios:

  • Novice entry: Limit single-trade risks through isolated margin mode to avoid large losses.

  • Trading high-volatility currencies: Use isolated margin for highly volatile altcoins to prevent a single position from collapsing the account.

  • Arbitrage and hedging: Independently manage positions of different strategies to reduce risk transmission between strategies.

• Risk Control Suggestions:

  1. Reasonably set margin: Adjust based on the currency's volatility (e.g., set Bitcoin's isolated margin at 5%-10% of the position value to reduce liquidation probability).

  2. Combine with stop-loss tools: Set stop-loss prices in isolated margin mode to proactively control loss ranges, which is better than passive liquidation.

  3. Avoid excessive leverage: Although isolated margin mode isolates risks, high leverage (e.g., 100x) can still cause liquidation due to minor fluctuations. It is recommended to use leverage ≤10x.

VI. Comparison with Cross Margin Mode

Dimension	Isolated Margin Mode	Cross Margin Mode
Margin Scope	Independent allocation for individual positions	All account funds used as margin together
Risk Transmission	None, risks confined to a single position	Yes, losses from one position may deplete all margin
Capital Utilization	Lower (funds locked per position)	Higher (funds allocated uniformly)
Suitable for	Risk-averse investors, novices, diversified strategy users	Professional traders, high-risk takers, hedging strategists

VII. Notes

• Platform rule differences: Isolated margin maintenance ratios and liquidation mechanisms may vary across exchanges (e.g., Binance, OKX), so confirm in advance.

• Liquidity risk: In extreme market conditions, isolated positions may fail to liquidate in time due to insufficient market liquidity, leading to position piercing (losses exceeding margin).

• Psychological misunderstandings: Isolated margin mode is not "risk-free". Do not blindly use high leverage due to risk isolation; always maintain rational trading.

Through the isolated margin mode, investors can achieve "risk modularization" in contract trading, both participating in market volatility opportunities and controlling single-trade risks within a bearable range, serving as an important tool to balance returns and risks.