Dollar Cost Averaging: a simple strategy that is vital to your profitability!
What Is Dollar-Cost Averaging(DCA) and why is it considered a vital trading strategy to minimize risk, while increasing profitability long term?
What is Dollar Cost Averaging(DCA)?
DCA is a highly strategic, yet simultaneously simple technique where you, the trader, invest in a fund, stock, or in this case cryptocurrency, over a period of time at regular intervals to reduce your average cost per share over time. This helps investors spread their buys over time to reduce the impact of price volatility and the dreaded Fear-Of-Missing-Out(FOMO), as investors often incur during said price volatility.
Investors risk ending up in a losing position due to a price drop when purchasing ‘highs’ with a lump-sum investment, otherwise known as an (All-in). The investor then must make the decision whether to hold (hodl) or cut that position at a loss due to the risk associated with an all-in. It’s easy to see green candles and jump all-in on a position, or see red candles and quickly decide to dump out.
However, cryptocurrency market volatility means that coins trend from support to resistance and then back down to support again before making moves higher. Timing bottoms or tops is something even the most seasoned professionals struggle with, which is why you’ll hear the top traders say they’ve been “accumulating,’ or ‘taking a profit’ on tokens over time, mitigating those risks.
How does DCA help?
Top traders know that Capital preservation in a volatile market is key and whatever terms they choose to call de-risking their entries or exits, one form or another it’s DCA. By spreading your investment over a period of time using the DCA method, whether it be days, weeks, months, etc. you mitigate the risk of volatility and the emotions of seeing the price of your purchased token drop. Splitting your investment into smaller separate buys at various times can give you a better average price for your position, giving you peace of mind that you played the market with a clear head rather than FOMOing into a position.
Example of DCA:
An investor decides to buy $1000 in Cryptocurrency XYZ at the start of the New Year, January 1st with the intention to hold long term.
January 1st price of XYZ was $40.
- February 1st: $32
- March 1st: $24
- April 1st: $34
- May 1st: $46
If said trader purchased ‘All In’ on the first day of January, he/she would have bought 25 XYZ tokens @ $40.
However, if that same investor decided to put in $200 at the start of every month they would have averaged their buy price at a lower cost to receive more tokens overall!
- Jan: 5 XYZ tokens @ $40
- Feb: 6.25 XYZ tokens @ $32
- Mar: 8.33 XYZ tokens @ $24
- Apr: 5.88 XYZ tokens @ $34
- May: 4.34 XYZ tokens @ $46
Total XYZ Tokens using DCA: 29.8
Compare that with an ‘All-In’ Buy on January first where you could have only bought 25 XYZ tokens on January first, you have a +4.8 XYZ Token gain!
What about someone who desires a certain amount of tokens to achieve a minimum?
Let’s use a real-life example using the actual BTC price over the first 4 months of 2020. Let’s say your goal was to buy 0.25 BTC tokens every month for 4 months.
BTC price on:
- Jan 1st: $47,777
- Feb 1st: $38,733
- Mar 1st: $44,443
- Apr 1st: $46,307
For 0.25 BTC you would have paid: $11,944.25 in January; $9,683.25 in February; $11,110.75 in March; $11,576.75 in April; which totals to $44,315 or a net gain of +$3,462 over an single buy in January. That’s an extra $3,462 which you can use to spend on yourself, family, expenses or buy even more BTC!
As shown above, a DCA Strategy is effective at obtaining either more tokens, and/or getting them at a cheaper price. Using Mizar’s Bots you can do so with a simple click which will execute a DCA strategy but with a very particular advantage in customization! DCA Bot’s are fully customizable to your investment strategies so that you can time your entries or exits will give you an edge while maintaining a peace of mind!
Check back on Wednesday where we break down Mizar’s DCA Bot and BotLabs and how it will take your trading to the next level, giving you freedom & profitability while being safe & secure.
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