Cross margin trading is a risk management strategy in cryptocurrency trading in which traders use their entire account balance as collateral for their open positions.
Using an account balance as collateral means that the entire amount of the account is at risk to cover future trading losses. Cross-margin enables higher leverage, allowing traders to open larger positions with less capital. It carries more risk but prevents the liquidation of individual positions by acting as a buffer to the account balance.
To reduce risk, margin calls may be issued and traders must carefully monitor their positions and place stop-loss orders to limit losses. Cross margining is an effective strategy for experienced traders, but it should be used with caution and a solid risk management plan in place. Newbies and those without much trading experience should fully understand the platform’s margin rules and policies.
How to use cross margin in cryptocurrency trading
To understand how cross margin trading works, let’s consider a scenario where trader Bob chooses cross margin as his risk management strategy and has $10,000 in his account. This trading strategy involves using the entire balance of one’s account as collateral for open trades.
When Bitcoin (BTC) is trading at $40,000 per BTC, Bob chooses to go long and purchases 2 BTC using 10x leverage, thereby controlling a 20 BTC position. However, it’s worth noting that he used the first $10,000 as collateral.
Fortunately, the price of Bitcoin surged to $45,000 per BTC, making his 2 BTC worth $90,000. Bob chooses to lock in the profit and sell his two Bitcoins at a higher price. As a result, he ended up with $100,000 in his account – a starting capital of $10,000 plus profits of $90,000.
However, if the price of Bitcoin drops significantly, say to $35,000 per BTC, then Bob’s 2 BTC position is now worth $70,000. Unfortunately, in this case, Bob’s account balance is not large enough to offset the loss from the price drop.
The position would have been secured with his original $10,000 in collateral, but he will now have an unrealized loss of $30,000 (the difference between the purchase price of $40,000 per BTC and its current value of $35,000). Without more money in Bob’s account, his situation will become precarious.
In many cryptocurrency trading platforms, a margin call may occur if losses are greater than available collateral. A margin call is a request from an exchange or broker for a trader to deposit more funds to offset losses or reduce the size of a position. To prevent future losses, the exchange may automatically close some of Bob’s positions if Bob is unable to meet margin calls.
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