Active trading not working out for you? Try DCA, or dollar-cost averaging.
Rather than buying low and selling high, or maintaining a constant eye on the market for active (or compulsive) trading, dollar-cost averaging (DCA) can be a more profitable trading strategy for investors.
But! DCA all depends on the asset picked, and the amount of time an investor has. All you need is patience and plenty of discipline to get started on practising the art of trading without trading.
What’s dollar-cost averaging?
Dollar-cost averaging is a method of trading. However, how the term is defined slightly differs, depending on the financial market you’re in.
Generally, DCA entails buying (or selling) the same dollar amount of an asset at regular, repeated intervals. Investors would ignore short-term price changes during these repeat trading periods, and would not follow any decisions when a market bottoms or peaks.
In theory, when you dollar-cost average in or out of a position, DCA would have you pay less in dollars for the investment you’re making over a long period of time, compared to trading while timing the market.
Traditional financial markets accumulate with DCA while in bear markets, and would also sell out of a position during a bull market with it.
But to DCA with Bitcoin is a bit different. Dollar-cost averaging in Bitcoin is to make automatic recurring purchases, regardless of bull market, or bear market.
Regardless of TradFi, DeFi, or whatever’s in between, the idea of DCA is to chill out. While other investors are attempting to outsmart the market, using DCA as a trading strategy takes panic off the shoulders, as DCA isn’t reliant on constant price-watching.
Is DCA right for me?
Are you an upstart investor looking to grow your portfolio? Why not try DCA?
DCA is a great method to grow your earnings over time, and requires less effort than other prominent investing strategies.
Most investing firms however advise on keeping 5% of your portfolio with crypto – but please be aware of your own risks while trading.
However, if you’re thinking of sacrificing a large amount of your savings to dollar-cost averaging crypto for a potential huge return in the future, please think again. No investment is worth gambling that far for, and is an unwise decision.
Also, DCA isn’t a set-and-forget investment strategy. You’d still need to dedicate a bit of time to keep up with the news to make your own investment decisions, and to perfect the art of DCA.
How do I DCA?
When you’re an independent trader, you don’t have the means to constantly analyse patterns, nor have the help of a professional trading desk.
If you’ve tried to follow the market, you’re basically doing the same thing an entire trading firm is supposed to do. But it isn’t too late to change your ways! Trade smarter, not harder!
Step 1: Pick an asset
In order to beat the market with DCA, find an asset worth supporting, one that you believe that will appreciate over time.
But just setting up recurring buys and forgetting won’t cut it – you’d still need to stay on top of your game by doing your own research.
Start by trading an asset you know already – or one that you’re keen on sticking with for a while, despite temporary ebbs and flows. If you pick an asset that you’re fully on-board with, you’re less likely to sell in a panic when there’s a price dip.
Think of it this way: DCA runs on the principle of picking on a meaningful token to invest in, for what crypto can potentially grow into.
Step 2: Pick a time horizon
DCA is usually a long-term trading strategy.
Profitability comes from an investor’s time horizon, and picking an asset worth sticking with for a while is compulsory.
Having trouble visualising what can happen with an asset you’ve picked? Crunch your numbers into a crypto dollar-cost averaging calculator.
Step 3: Make a list of deal breakers
With a long-term strategy like DCA, it would be difficult to figure out when to jump ship.
To prevent that, make a list of events or happenings that are deal breakers – or examples of bad news that would make you want to stop investing or accumulating the token.
For example, maybe a “flippening” would be a deal breaker – where the asset you’re rooting for is overtaken by another asset in the market. Maybe crypto being banned in a country can be a deal breaker, or even tighter crypto laws in any area.
Making lists like these is also a great way to find out your priorities in sticking with an asset, and an exercise in preparing for scenarios where prices may be down. Maybe you’d still want to keep investing in that token, even if it’s overtaken in the market.
Think of it as a potential reality check, and a starting point to reference as you adjust how much you’re investing in an asset.
Step 4: Adjust
As with step 3, you can’t just autopilot on DCA.
As you continue on investing in a token, you may want to update your priors and investment strategy as new information or news comes in regarding a token.
Adjusting can take the form of putting in less money into buying a given asset – or even adding more in, if you’re sure that a sell-off is temporary and there’s an opportunity to lower a cost basis – or the price you’ve originally paid to purchase the asset.
The art of DCA
For many crypto traders, constantly checking token prices has become a new addiction. With DCA, you can avoid compulsive buying and scrolling and do without constant streams of trading alerts.
Although much of trading is reliant on speculation, a lot of anxiety can rise. Never let your investment methods take control of your life, but rather, use your investment as a way to build and improve yourself.
Chasing positions can also cost you a lot of time – and money. Why not spend that extra time you’ve gained with DCA to reward yourself?