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Making Consistent Profit With Dollar Cost Averaging (ELI5): Safer Way To Trade In This Bull Market.
As we are still in the positive side of the crypto market, you wouldn't want to miss the opportunities you can take from it, right? Almost everything is going, then goes down and up again - because the crypto market, especially right now, has so much volatility.
Volatility is what most traders love the most because they can possibly gain more than those who just hold their coin/token because they can anticipate whether the market is going down a little - of course with enough and understanding about the crypto market.
In this volatile market, every traders can gain huge amounts from their with leverages. Just a small change of price/percentage can give me good gain and they can take it out if they want and look for another possible entry.
Well of course, huge capital can have huge profit and huge losses.
But of course, Leverage Trading is the riskiest play that everyone, especially to someone new in the crypto market, can jump into. Aw we know, Leverage Trading can possibly double your capital in just an hour but it can also possible take all your capital in just a minute/s - loss.
In this article, it will not be about the Leverage Trading where when you lose, you can't get your money back unless you trade and win again, it will be a basic type of trading that you can only lose if you sell your asset with losses - Spot Trading.
And with Spot Trading, there's higher chance that you can take your capital back or even with a profit if you apply a good purchasing method - Dollar Cost Averaging or DCA.
Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals. In effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices. Dollar-cost averaging is also known as the constant dollar plan.
In simple terms, it's another way of diversifying your capital through position sizing for a certain coin or token.
Here's an example;
Let's say you have $1,000 as your capital and you want to invest it only in Bitcoin Cash (BCH).
You saw that the crypto market is having a momentum where most coins are going up and down and you want to jump in to Bitcoin Cash because it is one of the few that haven't pump yet.
In order for you to avoid huge loss in your spot account, you need to invest your $1,000 in Bitcoin Cash responsibly and not putting it all in one go.
First, you decide to put $100 in BCH with a price of $800 per coin. But because of the volatility of the market, BCH went down to $700 and this is where you can make your second position and put $200 in it. And if BCH goes all the way down to $600 price range, you can add your $300 in it.
Why you should do these this way?
If you don't do Dollar Cost Averaging, and if you bought $100 of BCH at $800 price and the price of BCH goes down to $600, you need to wait for it to go back to $800 price for you to have a break even.
But if you apply Dollar Cost Averaging, your break even price will be a lot easier to reach and you can be at profit if BCH manage to get back to your first buying price, which is $800 from the above example.
Let's do the math of how does it work.
From the example above, and you applied Dollar Cost Averaging let's calculate it.
Buy amount and buying price:
$100 at $800 per BCH
$200 at $700 per BCH
$300 at $600 per BCH
In total, you invested $600 in BCH from your capital.
Like I mentioned, if you didn't apply DCA, your break even will be at $800, but will DCA it will be a lot nearer to reach your break even.
Let's add the buying price:
$800+$700+$600 = $2,100 (total buying price)
Then divide it depending on how many times you make a position, in this case, we bought 3 times so we only divide into 3 too:
$2,100 ÷ 3 = $700 (price of BCH to have your break even)
So, for you to have your $600 amount back, BCH needs to go up to $700 price.
But, if BCH manage to get back to $800 price (which is your first buying price), then you will already be in profit of $85 instead of just having a break even because you applied DCA.
The reason I called this as a safer way of trading is because you can't get liquidated if your money is in your Spot Account. If ever the coins you bought keeps going down, you will not lose any of your money not unless you sell it. This is why you must and should only invest to certain cryptocurrencies that you know and you truly believe in.