DCA is a familiar term in the cryptocurrency trading world. This investment strategy is both easy to implement and highly effective for traders. However, you also need to clearly understand the nature of DCA effectivelyapply DCA in coin trading. Join Crypto Trading to learn about DCA and how to apply this strategy through the article!
What is DCA?
The term DCA in English is an abbreviation of Dollar Cost Averaging, which means price averaging. Simply put, DCA is when an investor buys an asset multiple times at different prices. The most common price is determined by the average of all the prices of each purchase.
The strategy is commonly applied in the financial market in general and cryptocurrency in particular. The main purpose is to effectively minimize risks during the investment process.
Average cost formula in DCA
Average purchase price = (P1x Q1 + P2 x Q2 +…+Pn x Qn)/ (Q1+ Q2 + …+ Qn).
In there:
P: Purchase price n times
Q: Number of coins/tokens purchased for the nth time
See more: Capture fluctuation volatility trading professionally
Advantages and disadvantages
Any strategy or method of trading in the financial markets is more or less effective. However, there are always disadvantages that go hand in hand with advantages, and no exception.
Advantages
- Risk Reduction: is a strategy that helps traders reduce risks and protect capital safely by allocating investments. When the market falls, it is an opportunity to buy. Therefore, contributes to promoting long-term profitability when prices begin to enter an upward cycle again.
- Optimize investment costs: The cheaper you buy a position, the higher your profit will be when the price recovers. The market is always volatile and DCA helps you have enough money to buy the cheapest positions.
- Limit emotions: A veteran trader and a newbie trader have a clear difference in trading psychology. This strategy will help you be less influenced by psychology when facing price fluctuations. However, you need to be alert to the Crypto Bubble phenomenon, where coin prices continuously increase beyond their real value.
Disadvantages
- Low Profit: is a safe strategy for new traders in the market. The nature reduces the risk of loss. Along with that safety, the profit will be more limited.
- Time-consuming and costly: a strategy with many transactions. Therefore, it is natural to spend a lot of transaction fees. When buying many transactions, you also spend a lot of time evaluating, analyzing, and opening positions. In the long run, the optimal strategy for you.
What is the principle of using in crypto?
To be successful in trading cryptocurrencies, you need to remember the following principles:
DCA is a strategy for holders
Holders are people who hold coins for a long period. They aim to optimize the cost of owning coins. While traders are people who buy and sell continuously during the day, DCA is not suitable.
DCA is a multiple trading strategy
If you only buy a coin once, the DCA strategy cannot be formed. The DCA strategy is only effective when you buy a coin that is falling in price in the short term or is moving toward the support zone. Especially in a bear trap market. What is a bear trap? It is a market that is giving a false signal that the price will continue to fall a reversal is about to happen.
Thanks to this, subsequent purchases will be cheaper than the previous one, thereby accumulating assets very intelligently.
Effective coin trading method with DCA
DCA is a strategy of averaging the cost of multiple purchases. So how to get the lowest cumulative average price? Let’s explore the 2 DCA strategies below.
Periodic DCA Strategy
Simply put, periodic investment is when you spend a certain amount of money to own a coin according to a predetermined plan. For example, you plan to buy 1 BTC every month, regardless of whether the value is high or low. At this time, you are completely confident that BTC will increase in price in the future. Applying the DCA strategy will help you buy cheap coins.
- Pros: This strategy puts your mind at ease. You don’t need to care whether the coin will increase in price or not. You just need to believe that the coin has great potential.
- Disadvantage: You have to be a strong holder to apply it.
- When to apply: If you are a seasoned investor, can manage and effectively allocate capital. At the same time, you need to prepare a good enough cash flow to avoid breaking down halfway.
Monitor and use DCA Crypto appropriately
Compared to the form of periodic investment, this strategy is somewhat more flexible. Instead of buying continuously periodically, you will choose the right time to buy. By listening to market news to assess that the coin will increase and buy.
- Advantages: This form is suitable for traders who know how to observe and have analytical skills. You can wait for the low-price zone and then buy. This will help you own coins at the most optimal average coin price.
- Disadvantage: It requires you to spend more time analyzing the volatility and the market to find the right entry point.
See more: MEXC: Open a MEXC account, invest effectively
How to apply DCA in detail when trading cryptocurrencies
Through the basic strategies above, we will analyze in depth how to apply the DCA strategy in practice.
Step 1 – Choose a potential coin
The nature of DCA is aimed at long-term traders, for 1 or more years. To maintain continuous investment, choosing the input coin to follow for the long term is an important factor.
The top coins will be BTC or ETH. Choosing a potential coin depends on each person’s perspective. Here are some factors to help you evaluate whether it is a potential coin or not:
- Large capitalization: Investors often prioritize coins in the top 10 highest capitalization.
- Strong development team: creating successful projects.
- Project development roadmap.
Step 2 – Choose the appropriate DCA form
You can choose a regular investment strategy or a reasonable monitoring strategy. You can also apply other methods to determine the exact buying point. Note that once you have chosen the appropriate form, follow that strategy for the long term.
In addition, you also need to count, monitor, and record all order entry/exit operations. This helps you manage your invested capital and track optimal profits and losses.
Conclude
In short, the DCA or average cost strategy is relatively easy to use. However, to apply it effectively and operate well, you need to evaluate the market and analyze the technical aspects. Let’s learn a lot of useful knowledge about DCA and methods and strategies for trading cryptocurrencies in the following articles of Crypto Trading!
FAQs
Should You Apply DCA Strategy in Crypto Trading?
The Bitcoin or Crypto market both contain risks and large fluctuations. Therefore, if traders focus money on one price level, they will be at higher risk than traders. The DCA strategy will help traders allocate their investment capital reasonably, thereby reducing risks. At the same time, you will have time to evaluate the market instead of constantly observing and placing orders.
Should I Use DCA With Multiple Coins in Crypto?
Traders should choose many coins in the Crypto market. However, these coins should all be among the top coins. Avoid the risk of evaporation.
What mistakes do investors often make when using DCA?
The DCA strategy is very easy to use. However, some traders still make mistakes that lead to failure. Specifically:
- Using DCA while using leverage multiplies risk. Should only be used with spot trading.
- Use DCA with illiquid altcoins. Bitcoin is the asset with the largest trading volume. However, altcoins with low trading volume and low liquidity will have many potential risks.
- Use DCA to follow the crowd to diversify your coin investment portfolio.
