DCA stands for Dollar Cost Averaging, a term that in the world of crypto bots, it can be used to denote two very different trading strategies. In this article we will review these strategies, their key differences, and how combining them can open a world of new possibilities.
First of all, let's examine the term DCA and understand why there are two different strategies with the same name.
The term "Dollar Cost Average" or DCA was first coined by Benjamin Graham in his 1945 book The intelligent investor. Graham puts forward DCA as an investment strategy whereby you would buy the same dollar amount of an asset at fixed time intervals (every week, month, or quarter), independently of its price. This way, you would buy more shares of the asset when the prices are down and fewer shares when the price is up, thus averaging your overall cost of the asset and minimizing the risk of volatility. This strategy quickly became popular for 3 good reasons: it sets the habit of continuously investing, it avoids mistiming the market, and it removes emotion from the buying decision.
Fast forward a few generations, and crypto and automatic trading bots became very popular. Crypto is a risky asset and consequently attracts risk-prone traders and investors. In the never-ending quest of increasing profits and taking more risk, someone figured out that instead of using a stop loss to cut your risk when trading, you could use the Martingale strategy, buying more of the asset if the price moves against your take profit. This strategy helps obtain a better average entry price and therefore increases your chance to achieve the take profit level, but it also increases your position size as the market moves against you which could result in heavy losses. Because of this price averaging capability and riding on the already familiar "DCA" term, these bots were also named DCA bots and became quite popular.
To clarify which strategy we are referring to going forward, we will name Time-DCA the former and Price-DCA the latter.
Time-DCA is used as a risk-minimizing strategy for investing, while Price-DCA is used as a risk-increasing strategy for trading. While they could not have been any more different from each other, something magical happens when you combine the two.
The Double-DCA strategy is the combination of these two strategies into one, reaping the best of both worlds. In this strategy, you would Time-DCA by opening a new deal for the same dollar amount periodically (every week, month, or quarter) coupled with a Price-DCA that would allow each deal to buy more (up to a predefined amount) if the price falls. This way you would minimize the risk of volatility by investing regularly and further average down your position if the price falls.
We've made it really easy for you to set up this strategy in Gainium. Simply head to the trading bots page and create a new bot. On the deal start condition, select time-based. After that, input how often you would like to open new trades and configure the Price-DCA as you would for any other bot.
The Double-DCA strategy is a great way to invest in crypto and maximize your chances of averaging down the cost of your assets. The key is to find the perfect balance between the two DCA strategies. If you set the Price-DCA too low, you might not be able to buy enough when the price dips and miss out on the profits. On the other hand, if you set it too high, you might end up buying too quickly and miss better prices later on.
As with any strategy, the Double-DCA has its own risks and limitations that need to be taken into account. Make sure to use it as part of a good portfolio management strategy to profit from crypto in the long term.