What is DCA?  How to use the average price strategy to increase profits

What is DCA? How to use the average price strategy to increase profits


2021-03-23 05:12:41

DCA or price averaging strategy can be an effective way to manage risk when investing in assets such as stocks, electronic money… I will guide how it works and its pros and cons for easy understanding.

When considering investing, if you have a large sum of money on hand ready to invest. DCA is a method that may be suitable for both the experienced investor and the novice investor to reduce the risk of seeing their investment decline in value.

What is DCA?

DCA (averaging price strategy) is a method of dividing the amount of capital to invest in a fixed and more frequent manner over a long period of time.

This is a smart investment strategy. However, you must not confuse it with you catching the bottom of the price of an asset when it plummets to buy it at a good price.

DCA is really good if you correctly predict the trend by market analysis. And of course the price averaging strategy must involve technical analysis or particularly instrumental indicators like GHOST, MACD, Bollinger Bands, Elliott waves, …

The Bitcoin problem using DCA

Now do a Bitcoin investment math problem for you to visualize easily.

Watch now: What is Bitcoin? The most comprehensive information about virtual currency BTC

Problem 1: Buy Bitcoin once with all assets

This is the case I think most of the time is true for newcomers to the market. Let’s say you have $ 10,000 and buy all that with bitcoin for $ 8,000 for example. You get 1.25 BTC.

After Bitcoin achieves the increase / decrease you want to sell, we will have a profit / loss table with the selling prices as follows:

Basic bitcoin investment problem

This is a basic problem. Next you use your average cost of capital. Try to see the results it will get offline. Here I will classify according to market developments so that you can consider the most comprehensively.

Problem 2: DCA in a bear market

This is the one problem that makes the DCA method really shine. Now, assume that the plan with the above $ 10,000 capital will be bought in increments. Divide the capital into 4 times, then use $ 2,500 for each installment.

Proceed to buy bitcoin at 8000, 6000, 5000, 3000. So, after 4 times of buying, the number of Bitcoin you hold is 2.0625 BTC. Then BTC returns to the uptrend, you will calculate profit and loss at the prices if sold as below table:

dca when bitcoin falls in price

You see, if as expected, the profit will be very terrible. As bitcoins fell, brothers increased their holdings more than they did one-time purchases. Capital increased as the price of BTC increased with a total return of ~ 1.5 times when sold at $ 12,000.

Problem 3: DCA in a sideways market

When the market is sideways for a year, for example, prices move in a narrow range. You can buy bitcoins at 4 times at prices 8000, 7500, 7000, 6000. With these purchase prices you will buy 0.877976 BTC.

You can see that it’s like the one-time-buy problem with all the capital, right.

The market can move sideways, up and down. But end where they started for the long haul. However, you will never be able to accurately predict where the market is going.

If bitcoin had moved even lower, rather than higher, the averaging price would allow for even greater returns. This is when you can be sure that you will have long-term, not just immediate, returns.

Problem 4: DCA in a rising market

In this last problem, also divide the $ 10,000 capital into four times with the price 5000, 6500, 7000, 8000. So after 4 purchases you have 1.55 BTC. When the price increases you have profit and loss in the following table:

dca in the market goes up

This is a problem that DCA performs a bit poorly, at least in the short term. Bitcoin went higher and then continued to rise higher. Hence, averaging price doesn’t help you maximize your profits. This involves buying the whole thing in one go.

But unless you’re making short-term profits, this is a rare life scenario. Bitcoin can evaporate, kkk. So if you are investing in the long term, it is advisable to stretch your capital in transactions. Even that means you have to pay more money at a given price.

The average price strategy is really good

In general, the price averaging strategy offers three main benefits that can be more profitable: Avoid fomo market, avoid market confusion, Think long-term investment.

Because investors often fluctuate between fear and greed. They tend to make emotional trading decisions when the market reverses.

However, if you were to use DCA, you would buy when people were scared away (green, look red, kkk).

Get a good price and set yourself a long profit. The market tends to go up over time and averaging prices can help you realize that bear market is a great long-term opportunity. Instead of being scared of things.

Limitations of the DCA method

First, probably the most talked about, is the humble margins. Buying more often increases transaction costs. However, with exchanges that charge less to trade, this cost becomes more manageable.

Furthermore, if you are investing long term, the fees will become very small relative to your overall portfolio since you are buying for long term investment purposes. Binance is my first choice because of its diverse ecosystem as well as reasonable fees.

Watch now: What is Binance exchange? Instructions for registration and use from AZ [2020]

Second, you can give up the profits you would make if you invested in a one-time purchase and the assets you bought increased in value.

However, the success of trading largely depends on identifying the market correctly when predicting the short-term movement of an asset. This is done by well-known and well-known analysts.

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