Wallet Balances are the amounts in your Ethereum wallet currently connected to dYdX (e.g. Metamask).
Account balances are any positive (supply) or negative (borrow) amounts held in your main dYdX account. All positive balances will continuously earn interest, and all negative balances will continuously pay interest. You can deposit to or withdraw from your Account Balances on the Account page.
Cross margin trading only uses funds from your Account Balances.
Isolated margin trading uses either your Wallet Balances or Account Balances. It will use your Wallet Balances if there are insufficient funds in your Account Balances. You may notice this in some unexpected situations. For example, going 2x requires a higher margin deposit than 3x, and therefore may necessitate using funds from your Wallet Balances in addition to your Account Balances if your dYdX balance isn't funded enough.
In general, we encourage traders to fund their dYdX Account Balances and trade from there - given that all positive balances will earn interest vs. sitting idle in your wallet. You can do this on the Account page.