DCA Trading: A Widely Used Quantitative Strategy

What is the DCA strategy?

Trading profits rely on buying at low points and selling high points, therefore, many traders need a simple programmatic trading strategy to open a position and place an order under certain conditions. If the market does not meet expectations, they will continue to increase their positions according to certain rules, lowering the cost gradually. If it meets the expected trend, they will close the position with a certain profit. In the digital currency market, traders often face the challenge of price fluctuations, especially in a market environment with high uncertainty. In response to this situation, the DCA (Dollar-Cost Averaging) strategy has gradually received more and more attention. It is not only a risk management tool, but also a way to simplify investment decisions.

The core concept of the DCA strategy is to follow fixed rules and continue to buy assets regardless of market price fluctuations. In this way, traders can buy more assets at a low price during the decline and ultimately achieve cost averaging. In simple terms, the DCA strategy helps investors overcome the difficulty of “market timing” and reduce volatility risk. Imagine that when you are optimistic about the market and buy all of them at once, you may buy just after the market peaks, and then the price starts to fall, and you watch the numbers in your account become less and less. That feeling of powerlessness makes people very entangled: should they continue to hold and expect a rebound, or decisively stop the loss? If you split the funds into small pieces at the beginning, you will be much more calm, and you can respond flexibly in the changing market, seize every opportunity to enter the market, and finally get a more ideal average price, thereby reducing the risks brought by local price fluctuations greatly.

Advantages of DCA strategy

1. Simplify investment decisions When buying assets, the first question for many investors is how to choose the right time to buy. They often feel anxious due to market fluctuations, which leads to missed opportunities. DCA simplifies the decision-making process by providing specific entry conditions or direct entry. The subsequent conditions for adding positions and closing positions make DCA a relatively complete strategy, which makes it easy for even novices to get started.

2. Avoid emotional influence Manual traders are often affected by market fluctuations, and many people make impulsive decisions when they are panicked or greedy, resulting in investment losses. The automated DCA strategy has corresponding decisions for market changes. If the market falls, you can continue to scale in your position, and if the market rises, you can close your position with profit. This allows traders to clearly understand future losses and gains, and treat short-term fluctuations more rationally.

3. Risk Management It often takes a long time for new traders to realize the importance of fund management. Only a reasonable investment ratio can survive in the market for a long time. The DCA strategy comes with simple fund management. It is a relatively complete risk management measure by diversifying transactions, time-sharing transactions, and smoothing investment costs.

The principle of DCA strategy

People often use “DCA” and “fixed investment” indistinguishably, and they are not exactly the same in this article. The main difference between DCA and fixed investment is flexibility: fixed investment refers to investing a fixed amount of assets at fixed time intervals (such as daily, weekly or monthly), regardless of market trends. DCA allows users to control the purchase price and the timing of purchase, such as triggering a buy order when the price drops to a certain percentage, and the DCA strategy has a clear take-profit timing, triggering a sell order when the market recovers and reaches the take-profit target.

Take the DCA strategy for buying long as an example: the user starts the trading strategy with a set of parameters (or chooses from conservative, moderate and aggressive presets). The strategy will start with the trigger trade and the first order will be executed. If the asset price drops to a specified percentage, the strategy tool will execute a second trade with an amount that is a multiple of the first order (or the same), repeating this process until the user-defined maximum number of orders, take profit or stop loss level is reached. If the profit target is reached, the strategy tool can choose to start the next trading cycle. Traders can accumulate funds in short-term declines and reduce the average cost by continuously adding positions, thereby capturing the volatility of the rebound market.

Comparison of DCA strategy with fixed investment and grid

Compared with fixed investment and grid trading, the DCA strategy has some unique characteristics and advantages. The main reason is that the DCA strategy adds additional opening and closing conditions.

The focus of the fixed investment plan is to purchase assets regularly with a fixed amount, which is suitable for long-term holding. Although this method is simple, it may miss the opportunity to buy at a low price when facing price fluctuations. The DCA strategy emphasizes flexible operation in market fluctuations, allowing users to use technical indicators (such as “MACD” or “RSI”) to choose the entry time, and to increase positions when prices are low, thereby reducing the overall investment cost effectively.

In contrast, grid trading relies on frequent buying and selling within a set price range, aiming to capture small price fluctuations. This strategy requires investors to pay close attention to market trends, and sometimes they may passively hold more positions due to drastic market fluctuations, which creates greater risks. The flexibility of the DCA strategy can replace some of the functions of the grid trading in some cases. For example, you can set the price to increase the position 10 times after a 5% drop, hold a total of 1,000U, and sell ​​after earning 20% ​​profit and closing the position. When the market is right, DCA can achieve this goal, while the opening interval and closing target of the grid strategy are bound.

Summary

In short, the DCA strategy combines the discipline and stability of fixed investment, investors can not only reduce risks and simplify the decision-making process, but also better cope with market fluctuations, making it a more adaptable investment method, especially suitable for investors who hope to achieve stable returns in the long run. FMZ is about to launch a perpetual contract DCA strategy, and welcome your comments and ideas.