DCA (Dollar Cost Averaging)
3 min reading
Have you had a clue of what this trading strategy entails? Find out what it is about by reading through this article.
DCA (Dollar Cost Averaging)
Cryptocurrencies and securities markets change daily and short-term fluctuations are difficult to predict. An investor can make a mistake and buy at the highest price, only to have to wait a long time for the market to recover to this level. Appropriate tools are used to avoid or greatly reduce losses when investing. One of them is the Dollar Cost Averaging (DCA).
Understanding Dollar cost Averaging
Dollar-Cost Averaging (DCA) is an investment strategy in which an investor distributes the total amount to be invested in periodic purchases of a target asset to reduce the effect of volatility on the total purchase. The purchases occur independently of the price of the asset and at equal intervals; in essence, this strategy eliminates much of the careful work of timing the market to make purchases of stocks at the best prices. For example, you allocate $100 every month for a year or two to buy cryptocurrencies, regardless of their prices. While the term ‘dollar cost averaging’ may seem complicated, it is a very simple method of investing that will allow you to increase the value of your portfolio while reducing risk. Over time, you can accumulate more stocks because the average value of the stock or asset is lower than if you invested a lump sum.
This investing approach differs from those in which investors anticipate decreased market prices and strive to invest at the appropriate time. Whereas with DCA, investors are buying regularly and can take advantage of market slowdowns by automatically buying more investments for the same amount of money.
The benefit of Dollar-Cost Averaging is that by investing automatically, you will eliminate the emotional element in your decision-making. Regardless of how much the price fluctuates, you will continue to stick to the predetermined buy rate of your desired dollar amount. So, you will save yourself from ill-considered and unforeseen expenses. In this manner, if the price falls dramatically, you won’t abandon your investment; instead, you’ll see it as an opportunity to buy more shares at a cheaper price. It’s impossible to determine the bottom of the market, so a Dollar Cost Averaging can help smooth out market timing. Of course, on the other hand, you may also miss an opportunity to invest at the right time before the market begins an uptrend in a bull market.
One of the drawbacks of DCA is that the marketplace tends to increase over time. This means that investing a big sum early is likely to outperform investing little amounts over time. A lump-sum payment will provide better returns over the long term as a result of the market’s upward trend. However, DCA is not a solution for all investment risks. You have to decide which project or currency to invest in, even if you choose the passive approach to Dollar Cost Averaging. If the investment you choose turns out to be a lousy one, you will always be investing in a losing venture.
Also, Dollar Cost Averaging is an excellent way to move large sums of money into the market. In a turbulent market, spreading investments across several months can help reduce risk. Of course, the Dollar-Cost Averaging approach does not guarantee profits or prevent you from losses in a down market.