The formation of a strategy in the fields of investment and finance is always a top priority because it determines the success or failure of that project. One of the strategies being applied by many members/enterprises today is DCA. So what is DCA? A summary of the basic knowledge of the DCA market will be clarified in this article.
What is DCA?
DCA is an investment strategy whose purpose is to minimize the impact of volatility when investing, or buying a large chunk of an asset or financial instrument. They are also known as unit cost averages, incremental averages, or average cost effects. In the UK, these are called average costs in pounds.
DCA is a financial investment strategy in which, instead of a one-time purchase of a financial instrument, the investment is divided into smaller sums and individually invested at predetermined intervals until full capital.
The volatility of a financial instrument is the upward or downward risk inherent in financial markets. In addition, DCA minimizes volatility risk by trying to reduce the average total investment cost.
How does the DCA strategy work?
How does the DCA strategy work? It can be understood that the investors who contribute capital consider the factors of exchange rate, market, currency, etc. After that, they will divide their capital according to a certain cycle of rotation. From there, whether market factors increase or decrease, you will ensure that your capital is at an average level and minimize losses.
This is also the very familiar averaging principle. Of course, when following this principle you may also experience losses or profits will be lower than with other strategies. This also completely depends on how your investment capital is allocated. Of course, it will also rely on “luck” as well.
Advantages of the DCA. method
For investors who are new to the financial investment market, especially the Crypto market, the price averaging method is the best way to start. Since they do not have much experience in reacting to price changes at this time, DCA will help users to be less emotional in financial investment transactions.
It can be seen that the DCA strategy is very suitable for investors with limited capital who want to accumulate assets. Although they do not have a large amount of capital to invest in surfing, they can invest small amounts of money in a relatively stable way for a long time.
Formula to calculate DCA
P: Is the purchase price per period
n: Is the number of purchases
For example: From January to June this year, on the first day of each month, Hoa spends 100 USD from his own salary to buy tokens of a project that Hoa thinks will increase in price in the long term.
The price of this token will fluctuate over the months as follows:
January: 10 USD
February: 8 USD
March: 13 USD
April: 6 USD
May: 10 USD
June: 15 USD.
Thus, if in January, Hoa uses 600 USD to buy tokens, then Hoa will only buy 60 tokens for 10 USD. By using DCA strategy, Hoa was able to buy at a lower price and more tokens in this case.
Notes when using DCA strategy you should know
To understand what a DCA strategy is is one thing, but to put it into practice is another. If you are a newbie, please pay attention to the following points to avoid the risk to the lowest level:
Considerations before paying forex (Forex)
Using the DCA strategy can bring a lot of risks when we use it with forex payments. When the investment market is more volatile, it is entirely possible to “burn” the account. In fact, many customers have encountered this risk when contributing capital for financial investment.
Identify the right trend
Analyzing the market and identifying trends in financial performance are the factors that help you successfully implement DCA strategy.
Should invest in the top coin
In cryptocurrency, you should not invest in junk money because the risk of this currency being delisted is quite high.
Have a clear take profit and stop loss level
To minimize the risk, you should balance managing the investment capital clearly. When you invest in any investment, if it has reached the take profit or stop loss level you have set, then it is best to stop immediately. You should not be too greedy or too regretful. The investment market is always volatile, so you never know what will happen next, right?
So, with the above sharing, you must have understood what DCA is, right? This is a very good strategy, but it also requires persistence. Therefore, investors should aim to include DCA as an option strategy, among other bold strategies such as target asset allocation, while diversifying and rebalancing financial portfolios. frequent.