There is no foolproof strategy in any market. Even if you are a successful trader or a newbie that has just entered the market you need to know that the “holy grail” of strategies does not exist. A trader that only chases strategies that brought him wealth in the past won’t do well. Traders that are successful in the long term realize that the key to win big is to listen to the market and adapt strategies based on market behavior as well as the macro environment.
However the strategy that we will talk about in this article is practically immune to market behavior, and pretty simple to master. Dollar Cost Averaging (DCAing) is a simple strategy that allows you to enter to add exposure to the market without worrying that you entered at the wrong time and the fear of losing bigger sums of capital.
Newbies often enter the market without a clear strategy and try to win big in a short time span. The crypto industry gives people the idea that making money is easy—which is often the case in bull markets—but as history has shown us, most retail traders enter close to the cycle top and start panic selling on the way down.
There are different strategies based on traders’ goals and if you are trying to copy someone from Twitter you might just be rekt as you have no idea how someone manages their trades and what financial goals they are chasing. Is the trader testing a new strategy? Are they even trading the position they posted? The questions go on and on. To make it, you need a strategy of your own.
This article will help you understand the concept of dollar cost averaging, its benefits & risks and how to start your DCA journey.
Dollar Cost Averaging explained
DCA in simple terms means investing smaller sums of your capital over time into any asset you want, whether that’s crypto, stocks, commodities etc., but today we will focus on Bitcoin. Newbie traders can use this strategy to avoid mixing emotions with trading which is a hard thing to do especially in the beginning of your trading journey. Traders with larger sums of capital also stick to a DCA strategy in order to minimize the impact of volatility in the market.
The main idea behind this strategy is that instead of waiting for the desired level to be reached and then pressing the shinny green “BUY” button with 100% of your capital, you should rather split investments into smaller sums which are invested in predecided levels or time intervals. I will explain how this can be done in the next section.
Markets do not just go in one direction (up/down), but after a big move down some kind of retrace to the upside is expected and vice versa, after a big move up, some kind of retrace is expected. The lower the market goes, the more you invest, however you can also buy coins when the market is going up, but this time you invest less capital and this is how you make sure that your average entry is low. And this kind of market movement gives this strategy a purpose. Remember, even if you are a successful trader with your own strategy, one portion of your portfolio should always be allocated to DCAing.
How it works
There are multiple options on how you can start your Dollar-Cost Averaging journey. First you need to decide if you are the type of trader that will pay attention to the market or you just want to be part of the market by automatically investing money on a predetermined time basis (e.g. monthly, weekly, bi-weekly etc.).
If you want to have exposure to the market without having to look at it too often you can choose an automatic DCA strategy where you will have an option to choose an asset (e.g. Bitcoin) or a basket of assets (e.g. Bitcoin, Ethereum and others) as well as the amount you want to invest in a predetermined time (e.g. monthly, weekly, daily etc.).
If you choose a basket of assets you can then split the invested amount into portions for each asset. It is always suggested to invest more of the allocated investment into the top coins. For example, if you choose only Bitcoin and Ethereum, I would suggest investing something like 80% in Bitcoin and 20% in Ethereum.
Automatic DCA is the simplest way to enter the market and not be a victim of your own emotions as well as build your wealth and a good average entry price. However, my suggestion is that this type of DCAing should be started when prices are low (compared to the all time highs), meaning that the current stage of the market is good for automatic DCA.
This type of DCA is a bit different as you need to have some knowledge regarding trading, but it can pay off if you stick to the original plan. This strategy requires you to decide the total amount you operate with. The main idea of this strategy is to invest bigger sums of money as we drop lower.
The first step you want to do before you start is to open the weekly timeframe and chart the key levels and mark your buy-ins. More experienced traders can also go further and mark levels on the daily timeframe as well. As these levels are reached you enter with a predetermined amount.
The lower prices drop, the bigger portion you invest, however, you must not run out of your predetermined capital allocation. Always prepare yourself for the worst: you do not want to run out of your capital if prices go lower than you expect, as you will be missing a golden opportunity.
There are two options on how you can execute manual dollar cost averaging. The first is by placing limit orders at the levels you have decided to buy at. The second is by entering when the market reaches a certain level by either a market or limit order. However, the second option is not recommended for most people as you can become a victim of your own emotions and decide not to enter.
Below in the “Bitcoin example” I will show you how to prepare a DCA strategy in which you do not run out of money.
When do I sell?
As long as prices keep falling you shouldn’t sell as you will make a loss. However, once the market reverses and Bitcoin starts reaching higher levels, you should do the exact opposite of what you did when prices were crashing.
Chart key levels (resistance) and plan the amount you will sell at that level, it’s of key importance that in the beginning you sell smaller amounts and, as Bitcoin pushes higher, you sell more. Profits generated from this strategy can be either used when BTC retraces (but remains in the uptrend) to buy again if key supports are reached or stored in a safe wallet to keep it as a back-up capital.
Having a plan is the most important factor when dollar cost averaging. The idea of this strategy is selling smaller portions in profit and keeping that for when the trend reverses and then you have ammo to repeat the strategy again.
The main benefit of DCA is reducing risk and not exposing yourself completely to the market in case of a crash. The goal of every investor is to have as low an entry as possible in order to secure profits when markets are healthy. In theory you buy low and sell high, but that’s often not how it works in real life.
In reality, we never enter the market right at the bottom and this is where DCA comes in handy. Deciding which levels we will enter on the way down helps us lower our average entry price and sets ourselves up for times when markets are healthy. Even if we opt for the automatic DCA strategy, prices sooner or later drop lower and each month/day/week when we buy, our entry gets lower. Keep in mind, it is not advised to start using this strategy when the market is in “full bull mode” and new highs are being made.
Even if you are not a trader, you probably know that with lower prices you can buy more assets for the same amount of money. This helps you position better when markets bounce, and gives you the opportunity to buy more coins than you would if you spent all your capital on day one.
When you are thinking about saving money by depositing into a savings account at the beginning of each month, you never deposit all the capital you have left, right? So, why wouldn’t you apply this mindset to trading? Investing $50 or $100 per month helps you become more disciplined as well as better positioned for the future.
By developing discipline, you avoid the fear of investing at the wrong time. Investing a huge sum of money at the wrong time can not only make you miserable, but many decide to “panic sell” and take losses rather than hold onto their position. Both these scenarios end very badly for investors.
Handle your emotions better
We could write a whole book on how emotions influence trading. If you’re interested in that—and I can’t stress how important this aspect is when it comes to trading—you can read more about how emotions can cloud your judgment when trading in my Crypto Trading Guide which is published on my website.
A DCA strategy helps you eliminate these emotions, especially if you use the automatic type of dollar cost averaging. By using this strategy we will learn not to act on “negative news” or panic sell in short term market crashes, moreover, we will be happy if they happen as our orders will be filled.
DCA is considered a safe strategy, however you still need to be aware of some risks before you start your journey. As mentioned above, it is not advised to start this strategy when markets are extremely bullish and close to making new all time highs—that’s when more active strategies pay off much more.
It takes patience to build wealth
Even though in theory DCA seems like a good strategy, it takes time to build wealth. Sometimes it takes a year or more to build up a decent position with a good average entry which makes traders ignore this strategy in hope of quicker profits.
Some traders use this strategy on alts and, worst of all, low-caps. This is a very bad idea since these assets might never reach higher levels again and can easily go so close to zero that the difference is a minor rounding error. Avoid being greedy and only use this strategy on Bitcoin, or Ethereum but with a smaller amount. As for anything else, keep in mind that most of the next cycle’s top performers probably don’t exist yet. If you’re still not convinced, use Web Archive to see what the most hyped coins were in previous bull runs. Imagine if you had DCAd into those.
Missing out on gains
It’s worth mentioning that by starting this strategy when prices are low, you could very well start buying around the levels where assets bottom and never manage to lower your average entry.
It can happen that you start your dollar-cost averaging right before the market becomes healthy again and by investing small amounts, you might miss out on bigger gains. What can then happen is that FOMO takes over and you start aggressively entering more and more on the way up and might do that all the way to the top, making your average higher by each buy. The main advantage of DCAing is to eliminate the detrimental influence of emotions, so giving in to this temptation defeats the point.
I wrote a similar article in the beginning of March 2022, however I feel like more details could be added.
Below I will explain my strategy on DCAing Bitcoin if you start with $10000. Keep in mind that this is just an example amount. The same can be applied with $1000 or even $100 and you are on your way to start getting decent exposure to the market.
Here is an idea of how you can plan your DCA strategy and entry/exit levels;
⦁ Open the weekly Bitcoin chart
⦁ Chart potential support and resistance areas
⦁ Place bids
⦁ Go enjoy life and wait for triggers
Keep in mind that the levels that you draw don’t have to be perfect, as you are buying on spot markets and you will not get liquidated if you miss the level by a few hundred dollars (it should go without saying that DCAing on futures is an incredibly bad idea; even if you don’t get liquidated, funding can eat into your profits and you’re exposing yourself to a bunch of unnecessary risk). Also, this strategy can be used on the daily timeframe as well. What matters is that you do not run out of money in case things turn to shit. Basically, be ready for every possible scenario and get the most out of it.
As mentioned above, if you are a trader you need to keep capital meant for DCA untouched. Always DCA as a separate strategy and have capital in case it’s needed. You don’t want to end up DCAing for a few months, and when the market crashes, giving you a golden opportunity, you run out of ammo.
Finally, there’s one important consideration for all long-term strategies: security. The old mantra of “not your keys, not your coins” is incredibly valuable, and DCA is one strategy where it’s very important to think about how you are going to store your coins. You’re probably using a centralized exchange to do DCA, as many of them offer the automatic DCA strategies that I mentioned above (e.g. ,,*), but for long term storage, you don’t want to keep all your coins there.
A hardware wallet is a very cheap investment—and considering the peace of mind it gives you, it’s one of the best investments you can make. You don’t have to constantly withdraw to your hardware wallet every time you make a purchase (especially if the purchases are smaller, so that withdrawal fees would be a considerable factor), but set a reminder to withdraw your coins every once in a while—maybe every month or every few months—and that way, you don’t have to worry about whether the exchange you’re using will go under.
Dollar-cost averaging has benefits and risks, however in my opinion it works well for both investors and traders, if one sticks to the plan. If you have never tried this strategy and are thinking of starting today, I highly suggest using the example I wrote about above and following the 4 steps I outlined. You don’t need to use the exact levels and amounts charted there—those are just examples to give you a feeling for how the process works.
Being a regular trader, I can tell you from experience that solely focusing on a DCA strategy will bore you if you want to be more active. It is wise to use this as a second strategy, which after time starts making you profit which you can use for other strategies or investments outside of crypto.
If you have any additional questions about this strategy make sure to drop me a DM or comment on Twitter.