From the foregoing, it is obvious that while both cross margin and isolated margin are examples of margin trading, the isolated margin is a secluded trading mode while cross margin uses the profit and loss (PNL) from other positions to keep the trading open. Here are the differences based on the following contexts:

Risk management

While isolated margin trading allows for more granular risk management, cross-margin combines risks across all portfolios. In essence, a trader can control the amount of funds they are risking under the isolated margin mode. While cross-margin can be beneficial when managing multiple positions to ensure that they remain open for longer periods, the combined risks may also potentially indicate higher losses or gains.

Managing Risks

Isolated trading is more suited for traders who want to manage risks on a single-case basis, especially when they have high expectations from them and want to keep the risks separate. Cross margin, on the other hand, is more suited for traders who prefer multiple positions that are hedging against each other.

Flexibility

Cross margin offers the trader the ability to allocate funds automatically since all available funds in the wallet will be used for trading. However, funds allocation in isolated margins is manual, forcing a hands-on approach in terms of margin maintenance.

Collateral and liquidation mechanisms

In isolated trading, the liquidation potential depends on the amount allocated by the trader. In essence, if the trader sets aside 2 ADA in his isolated margin wallet, only those 2 ADA are at risk of liquidation. But in cross-margin, all available funds in the wallet are used as collateral for the collective trading and all are at risk of liquidation.

Choosing between Isolated Margin and Cross Margin

It is pertinent to note that there is no right or wrong regarding cross-margin and isolated-margin trading. The risk management strategy of the trader will determine which margin mode is best suited for them.

If proper risk management strategies are put in place, liquidation can be avoided in both margin trading modes. For traders who prefer a speculative position where initial margin loss should be limited, an isolated margin mode is the best fit. Also, an isolated margin is best for traders who open a highly leveraged position, and a higher degree of control is preferred.

On the other hand, cross-margin will be more attractive for traders who prefer hedging positions and those who want to benefit from leveraging long and short positions simultaneously. Because of the unique use case of both margin trading types, some traders concurrently use both modes to effectively manage trading risks and accrue more gains. The question of which is better, therefore, is a matter of preference, rather than superiority.