Dollar Cost Averaging

Dollar cost averaging (commonly called DCA) is a strategy in which a trader places buy and sell orders at various prices in order to buy and sell at favorable prices. 

 

Let’s say you want to make money from spot trading on a 10000 USD account with the main goal of accumulating as much BTC as possible and that the current price of BTC is 40000 USD. You could use half of your capital (5000 USD in this example) to set buy orders from 40000 to 35000. If BTC rises, then you could choose to reassess your order placement. 

 

If BTC falls below 35000 and half of your capital has been used to enter you could then choose to buy more BTC at lower prices with the expectation of holding long-term. If you were very bearish on BTC, you could use the rest of your capital to set buy orders from 35000 down to 25000. 

 

After you have used your capital to buy BTC, if you are very bullish on BTC and BTC is trading at say 35000 then you could choose to not set sell orders or set orders at far higher prices such as 45000 to 55000. 

 

There are also short-term ways in which you can use ‘DCA’ to increase your BTC and USD holdings. 

 

Instead of setting far out bids and offers, if your fees allow — you can set them far closer.

 

Imagine that you are fully long BTC with all of your capital. You then notice a fair amount of short-term selling pressure building up in a range, you could take an aggressive move such as selling half of your BTC holdings and then layering in bids below the low point of the range to increase your BTC holdings. 

 

Below is a prime example of what that looks like. 

The repeated touches of the 38800 support level is a buildup of selling pressure upon the level. Selling half of your holdings at 38800 with the goal of layering the USD (or other fiat currency) 2-3% below the range low would have allowed you to increase your BTC holdings. 

Price went down a little over 12% from that range low. Any short-term bids you had set would likely have been filled and the trade would have been completed. 

 

Capital allocation

There is no right way to DCA into Bitcoin. You could use two bids with 50% of your capital in each or you could even use 6 orders with varying amounts of capital in each. 

 

Personally, I prefer to use 2-4 limit orders to DCA into Bitcoin. This can be done in a short-term sense, with orders spaced only a few hundred USD apart or it can be done in a more long-term sense with orders spaced out thousands of USD. 

 

Some traders prefer to have larger sizes farther away from price, so that smaller orders fill first. Personally, I like to use equal sizes throughout. 

 

High probability short-term profit DCA

Imagine that you have 20,000 USD in a spot trading account and you would like to make a short-term spot trade. Price is trading at 45000 USD and you believe that price will likely not fall below 43000 USD anytime soon so you place a bid of 10,000 USD each at the prices of 43500 and 44000. You also plan to sell all of your BTC holdings at 46000 for a nice profit (to set a limit sell order around 46000 once your bids fill).

 

In this scenario, if your bid at 44000 fills and then your offer at 46000 fills you would have made a profit of about 455 USD. If your bid at 44000 and 43500 fills and then your offer at 46000 fills you would have a profit of around 1029 USD. If neither bid fills, then Bitcoin will rise without you and you will have an unrealized BTC loss (because you can’t buy as much BTC at higher prices). If your offer at 46000 doesn’t fill and price dumps, you are likely long Bitcoin at lower prices than where you had initially purchased — and then you have a decision to either take trader A’s strategy of selling and buying lower to increase your BTC stack or to take trader B’s strategy of just keeping your offer at 46000. 

 

This type of immediate profit-taking can be done to make income, but it’s personally not a strategy that I think is a strong long-term play to make. Rather, far better profits can come from good order setting on a slower basis. 

 

A very important note on DCA

When deciding where to place bids and offers, do not under any circumstance use arbitrary points such as +5% or -4% even if they are used in examples above. This is not a good way to set orders. 

 

If setting bids, good order entry can include placing limit buys just below lows (and/or areas where you believe many longs’ stop losses are located), previous resistance (taking advantage of trapped shorts/sellers), points of previous high volume that are below the current price. 

 

If setting offers, good order entry can include placing limit sells just above highs (and/or areas where you believe many shorts’ stop losses are located), previous support (taking advantage of trapped longs/buyers), points of previous high volume that are above the current price. 

 

These price areas could be 1.5% away from price, or they could be 8.1% away from price. You should make your decision for order entry based on your timeframe and not on an arbitrary %. 

 

Going forward, remember that DCA is a method and not a strategy. Dollar cost averaging is a way in which you can improve the average price of your position, but it is not a strategy such that no outside analysis is needed.

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