Strategy 1: Buy every time DCA (dollar cost averaging) goes down
Pros:
1. Reduced Cost Averaging: Buying more every time the price goes down. By buying at different price levels, the average cost of investments is reduced.💵
2. Less Stress: You don't need to predict the market, you just buy consistently and every time it goes down I buy more.
3. Investment Discipline: Promotes discipline and avoids impulsive decisions.
Contras:
1. Need for Constant Capital: Requires having capital to continue buying during declines.
2. Risk of Further Losses: If the market continues to decline, losses may accumulate before it recovers.
Example:
Suppose you invest in cryptocurrency X. You start by buying at $10, then at $8, and finally at $5. So, your average cost is $7.67 per coin. When the price rises back to $10, you've made a sizable profit.
Possible Outcomes:
- Profit: If the price goes up after your purchases, you make a profit based on your reduced average cost.📈
- Loss: If the market continues to decline for an extended period, your investment could lose value before recovering.📉
Strategy 2: Sell, wait for it to go down further and buy back (Swing Trading)
Pros:
1. Capital Increase: The amount of assets purchased can be increased by selling high and buying back lower.💰💰
2. Higher Profitability: Potential for higher profits if market predictions are correct.🎰🎰
Contras:
1. High Risk: High probability that the market will not behave as expected, leading to losses.📉
2. Requires Skill: It requires good market analysis and time to monitor.
Example:
Suppose you sell cryptocurrency X at $10. You wait for it to drop to $5, and you buy back twice as many coins with the same capital. If the price rises again to $10, you double your investment.📈
Failure Example:
Imagine you sell cryptocurrency X at $10, expecting the price to drop to $5 so you can buy it back. However, after selling, the price instead of going down, goes up to $15. You are faced with two options: buy back at a higher price, which means an immediate loss, or continue waiting for it to go down, with the risk that the price will continue to rise even further.📉
Possible Outcomes:
- Buy back at a higher price: If you decide to buy back at $15, your equity is now lower and you get fewer coins than you initially sold. You therefore lose the opportunity to profit from the price increase.
- Continue waiting: If you continue to wait and the price continues to rise, you could miss even more opportunities to buy back at a favorable price, leaving you out of the market while prices rise.
Conclusion
The buy-and-buy strategy is simpler and better suited for long-term investors looking to reduce risk through cost averaging. The sell-and-buy strategy, on the other hand, requires more skill and time, but can offer higher profits if executed correctly. However, it can backfire if the market does not behave as expected.
What do you do, DCA or Swing Trading?
Tell me about your experience!
