📊 What is DCA and how dollar cost averaging helps reduce investment risk

Let’s talk about the concept of dollar cost averaging (DCA), how it works and what are the advantages of such an investment strategy

Incryptico » 📊 What is DCA and how dollar cost averaging helps reduce investment risk
5/5 - (1 vote)

The market constantly fluctuates from top to bottom and vice versa. During another downturn, inexperienced investors sell all stocks in a panic, and when trading levels rise again, they lose a large amount of potential profit. In order to avoid such troubles, you can use the tactic of dollar cost averaging (DCA). It consists in investing the same or approximately the same amount regardless of market fluctuations. DCA can help you limit your losses in the event of a trade downturn.

DCA: How does dollar cost averaging work?

Dollar-Cost Averaging (DCA) is a tool that investors can use to accumulate funds over the long term It is also a way to neutralize short-term volatility in the stock market.

The volatility of a financial instrument is the risk of upward or downward movement, which is inherent in financial markets.

DCA is a strategy that consists of dividing a single investment into smaller amounts that must be invested separately at regular, predetermined intervals until the full amount of capital is exhausted. This method is also called the average cost effect, and it is aimed at avoiding the mistake of making a one-time investment that may not bring benefits.

It is important to note that unit cost averaging only works favorably if the value of the asset increases over the investment period. The strategy cannot protect the investor from the risk of falling market prices.

The general idea of ​​dollar cost averaging assumes that prices will eventually always rise. Using this tactic on individual stocks without knowing the details of the company can be dangerous, as the strategy can encourage the investor to keep buying additional shares at a time when they should simply exit the process.

Investors using DCAs tend to reduce the underlying value of their investments over time. A lower cost base will result in less loss on investments that fall in value and more returns on investments that rise in value.

Example of cost averaging in dollars

Consider an example: you want to invest $200,000 in shares. With DCA, this can be accomplished in eight weeks by investing $25,000 weekly. We take a promotion, the price of which is $85. $200,000 could buy 2,353 shares with one investment, but using DCA we buy 2,437 shares, making a difference of 84 shares worth $6,888 at an average price of $82. Therefore, with DCA, you can increase the number of shares purchased when the market is falling and decrease if the share price is rising.

Options for dollar cost averaging strategies to maximize returns include buying securities in a downtrend instead of a fixed amount and buying periodically. Conversely, in an uptrending market, where stocks are rising, a large-scale selling plan is adopted.

Advantages of DCA

1. The main advantage of the cost averaging effect is that it reduces the impact of investor psychology and market timing on their portfolio. By following the DCA approach, investors avoid the risk of making counterproductive decisions out of greed or fear, such as buying more when prices rise or panic selling stocks when prices fall. Instead, dollar cost averaging forces investors to focus on putting in a certain amount of money consistently, ignoring the price of each individual purchase.

2. Buying marketable securities when prices are falling ensures that the investor will get a higher return. Using the DCA strategy ensures that you will buy more securities than you would if you bought a single investment.

3. Using dollar cost averaging tactics by periodically investing small amounts in falling markets helps survive bear trends. A portfolio using DCA can maintain a healthy balance sheet and leave the potential for the portfolio to grow in value over the long term.

How does DCA work on Binance?

The Binance platform offers a periodic investment method that includes the DCA principle. It is applied both to traditional investments and to crypto. This type of investment ensures that you will not miss out on the growth of the crypto project thanks to regular accumulation. So we offer a step-by -step guide to using the Recurring Investment feature on Binance .

1. Log in or register a Binance account and click the Buy Cryptocurrency button and the Credit/Debit Card button.

2. Turn on the “Recurring purchase” function.

3. Select the fiat currency you want to use and the cryptocurrency you want to buy.

4. Click on the “Recurring purchase” function, then choose the frequency of purchase: weekly, biweekly, monthly, or on a specific day and time.

5. Add a new card by clicking “Add new card” and enter the card details.

5.1. If you want to change the card to another, click “Change card”.

5.2. A list of saved cards will open, if there are already 5, you will have to delete one of them.

5.3. Please note that if the card you wish to delete is associated with another Recurring Purchase plan, you will be prompted to cancel the plan first before deleting the card.

5.4. Add a new card and click “Continue”.

6. You will see the order details. Check them and press “Confirm” within 1 minute. After 1 minute, the price and amount of cryptocurrency you will receive will be listed. You can click “Refresh” to see the latest market price.

7. While your order is being processed, you will be redirected to this page. You can check the status of your order by clicking “View History” or “Update”.

8. When the Recurring Purchase order is ready, you will receive the following message:

9. If the purchase did not take place, you can click “Accept new quote” or “Cancel payment”.

How to manage Recurring Purchase plans on the Binance platform

1. If you want to view the Recurring Purchase plans, click on “Orders”, then “Cryptocurrency Purchase History”.

2. Click “View Plan” next to the recurring purchase order you want to change.

3. Click on “Management”.

4. You can review or change the frequency of execution of the plan or stop it completely.

How to change your plan:

1. Select the plan details and click “Continue” to confirm the change.

2. Before confirming the new recurring purchase plan, check the order details.

3. The request must be confirmed using two-factor authentication.

In order to stop the plan, you must:

1. Click “Stop Recurring Purchase Plan”.

2. Click “Confirm”.

Leave a Reply

Your email address will not be published. Required fields are marked *