What is DCA? How does Dollar-Cost Averaging work?

What is DCA? When to use the DCA strategy? In this article, BHO Network will discuss an investment strategy known as the averaging strategy (DCA, Dollar-Cost Averaging). Also, learn how it works and some caveats when using this strategy.

1. What is DCA?

DCA stands for Dollar-Cost Averaging, an investment cost averaging strategy known as price averaging strategy. This is an investment strategy with the aim of reducing the impact of price fluctuations on asset purchases.

Simply put, DCA breaks down the investment amount into different parts instead of investing the whole capital at once. This strategy works to reduce the negative impact of a bad skewed entry point on your investment. This is a popular financial investment strategy in the crypto market.

2. How does the DCA strategy work?

Let's look through an example of a DCA strategy:

Example: First, the average stock price calculation is:

DCA = (Old price x Number of old shares + New price x Quantity of new shares : Total quantity Bought shares

In stocks, the DCA strategy aims to buy low and sell profitably when the price rises. However, stock market volatility is complicated when it comes to technical analysis. Here, let's take a look at the timing of the Bullish and Bearish markets.

• When the market is bullish (Bullish): you should buy a part to open a position in the accumulation phase. When the “breakout factor officially confirms the price, wait to buy more to avoid holding capital for too long.
• Bearish: This is a good time for DCA to add value. You should "hoard" by buying more shares than the initial mark. When the price trend reverses, the chances of profit-making are higher.

Even if you have the right direction to trade, the timing of your investment can still be skewed. This makes the whole transaction incorrect. The price averaging strategy helps to mitigate this risk.

Suppose you divide your investment into smaller chunks. Compared to you, I am investing the same amount in several bulk purchases. Buying at the wrong time is easy and leads to undesirable investment results.

The purpose of the DCA strategy is to buy and hold a position long enough that timing is not an essential cost averaging process of a job. You should also set up an exit plan for yourself.

In the case of BTC, despite periods of recession, BTC remains in a continuous uptrend.

Of course, averaging investment costs does not entirely reduce risk. This strategy aims at the risk of bad times, making the investment smoother. An investment cost averaging method is no guarantee of successful investment, basic research is needed.

3. The principle of operation of DCA

Using the DCA strategy will help reduce emotional investment. At the same time increase liquidity and flexibility in portfolio management. Investors using the DCA method do not need to constantly monitor the market to avoid following false information from the media.

You never know the lowest price and when to sell for the highest price. When to buy or sell is difficult to predict accurately when trading. The DCA strategy helps you buy the average price, reducing the risk of choosing the wrong time.

When the market is bearish in the short term, it creates opportunities to buy cryptocurrencies at the best prices. As a result, DCA can increase profits in the long term when the market rebounds.

If the market is falling continuously and shows no signs of recovery, you have limited your losses compared to investing all in one purchase.

In the case of cryptocurrencies in which you invest continuously for a long time, you will have to accept a lower return than investing all of it in the first place.

Read more: What are Pump and Dump? Signs of Pump and Dump

4. Outstanding features of DCA strategy

After understanding “what is DCA”, let's find out the advantages and disadvantages of DCA strategy in this section:

4.1 Advantages

The advantage of the DCA strategy is its easy implementation. This is the best way to start if you are new to the Crypto world, as you have less to react to price changes.

By using the DCA strategy, investors do not need to search for the best time to invest and still get a relative return. They just need to define a regular money account to support the investment schedule and start the process.

4.1 Cons

Although DCA can help you avoid bad decisions, using the DCA strategy regularly can sometimes cause you to miss great opportunities. Great for making big profits (Example: Big Crypto Dump in March 2020).

For investors who want to make the most of price changes, DCA is not the best strategy because the DCA strategy targets the average.

5. When not to use the DCA strategy

The market has a steady uptrend, it can be assumed that those who invest earlier will get better results. In this vein, attempting to average investment costs can reduce returns in a sustained uptrend.

The cost averaging strategy works well only when the primary trend of the underlying asset is bullish over the long term. If you misidentify, this strategy is also not profitable but your desire.

6. 3 notes when using the DCA strategy

What should be noted when using the DCA strategy? Here are 3 cautions when using the price averaging strategy:

• The price averaging strategy is only suitable for spot trading, it is not recommended for people to average the price in Margin, Future and other leveraged financial products. Because of the extremely high level of risk and the possibility of account burning.
• In Crypto, if you choose a Token with a bad foundation or implement a DCA strategy in a long-term Downtrend, the price averaging can suck your capital more and make you wait for a long time. Therefore, market analysis is the key to your success.
• You should balance managing capital to minimize risk. When investing something, if you have reached the level of taking profit or stop loss that you have set, you should stop immediately.

7. Who prefers to use DCA

As mentioned, DCA is one of the popular strategies used by investors who are new to the market and investors with small capital. Usually, new investors will accumulate experience and allocate small capital at the early stage to limit risks.

Long-term investor because the total capital often uses the DCA strategy is divided and evenly distributed over a medium and long-term period.

But if you are an investor with little time to follow regularly, DCA is a strategy you should be interested in. When investing according to the DCA strategy, you do not need to care much about price fluctuations in the market.

Read more: What is Gas fee? What you need to know about Gas fee

8. How to Apply DCA Strategy in Crypto

The market is highly volatile, it is difficult to predict the final price movements. Therefore, if you are a new and inexperienced investor in the Crypto market, then DCA is a highly suitable method.

To apply the DCA strategy, you must adhere to a disciplined and long-term investment plan. First, you need to choose a top cryptocurrency with a solid foundation such as: BNB, ETH, DOT,... Do not choose Tokens that are being completed, unclear, and with many fluctuations.

Next, you will create an investment plan that suits your financial capabilities. In addition, you should clearly define how long the investment period lasts, the point of taking profit, and stop loss.

Although DCA is a method to help you reduce risk, it cannot eliminate risk. If the Token is investing in a continuous decline in the long-term for too long, there is no sign of recovery, it must cut losses as soon as possible.

During the investment period, it is possible to combine Staking to take full advantage of the profitability of the cryptocurrency market.

9. FAQs about DCA strategy

After learning about “what is DCA” strategy, many people have questions. Below are the questions that BHO Network has compiled. Let's find out together.

9.1 What are the limitations of the DCA strategy?

Every investment method has its limitations. DCA is no exception, limitations can be mentioned such as: transaction costs are more than purchases, no maximum profit.

But you won't be able to predict the market accurately, DCA's goal is to help you navigate the average price.

9.2 Why apply DCA strategy to invest in cryptocurrency?

Crypto is a market with high risk, high volatility, it is difficult to determine when to enter the market. Even if you are on the right track, at the wrong time can also make the plan fail. Therefore, putting all your money into buying Tokens at a price will be riskier than splitting the investment many times.

9.3 What token is considered potential and can be applied to DCA?

There are many factors to evaluate a potential Token. You can refer to the following criteria: Large-cap tokens to avoid price manipulation in the market, clear, long-term project development roadmap, an experienced development team, and many investment funds large participating.

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Hopefully, readers will have figured out “what is DCA” strategy” and how to apply it and your investment plan through the information in the article. Please follow the theme of BHO Network to update the latest knowledge.