Dollar Cost Averaging (DCA) is a popular trading strategy. It is an trading strategy in which a trader regularly trades/buys a fixed amount of CFDs, regardless of the current market price. The idea behind DCA is to spread out the cost of an investment over time and reduce the average cost per unit of CFD instrument. This strategy is used to reduce the risk of buying an instrument at a high price and to mitigate the impact of market volatility.
The advantages of DCA are:
- Mitigates risk: DCA reduces the risk of trading a large sum of money into a CFD instrument at a high price, as the entire trading process is made gradually over time.
- Averages out cost: By trading a fixed amount regularly, the average cost per unit of the instrument is reduced, as the trader buys more CFD instruments when prices are low.
- Eases the emotional impact of market volatility: DCA helps to reduce the emotional impact of market volatility, as the CFD trader is not required to make trading decisions based on short-term market movements.
- Simplifies the trading process: DCA makes the trading process simpler, as the trader only needs to determine a fixed amount to invest and a regular interval, rather than making complex trading decisions.
Another complementary parameter for DCA is the martingale effect. Basically, it requires the trader to increase the size of the purchase at each successive drop in the CFD instrument’s price. The effectively lowers the average cost of purchase much faster than if a trader buys a fixed amount of instrument each time.
Although it is humanly possible to manage a DCA, such trading strategy is best left to a CFD trading bot that can monitor the market continuously and make objective trades based on pre-defined parameters.
It is important to note that DCA is not a guarantee of profits, as the market may continue to decline beyond the capital reserve set aside by the trader, but it can provide some peace of mind and stability in volatile market conditions.
In the next Tutorial article, we will explore how to use CFDHero to execute an effective DCA strategy.