A DCA (or “Dollar Cost Averaging”) strategy is the practice of investing into a currency at preset intervals to reduce the entry price of a position over time and mitigate volatility risk.
For example, when you enter a position with a lump-sum investment (all-in) you run the risk of purchasing “highs” only to see the price drop and end up with a losing position, that you must choose whether to hold, or cut at a loss.
However, if you DCA, you can divide your investment into smaller pieces and buy the asset at various points over time at different prices, thereby getting a better average price for your position and greatly reducing risks from the consequences of volatility.
You have $5,000 and decide to invest $1,000 every 30 days for five months.
If prices at the time of each entry were $100, $90, $80, $70 and $95, your average asset price would be the average cost of entry at $85.50.
Had you entered the entirety of your investment at the beginning, you would have paid $100 per share (almost 20% more!).
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