Improved Dollar Cost Averaging is a better form of DCA designed to improve the return of DCA by selecting the best moments to invest.
What is the Dollar Cost Averaging strategy?
The Dollar Cost Averaging is a technique used to invest regularly on a financial asset. The principle is simple: each month (for example, but you can change the interval) you invest the same amount of money.
When the stock price is high, you buy less shares. But when the price is low, you buy more of them.
Say, the stock is at 100 USD and you want to invest 1000 USD:
- You buy 10 shares.
- But if the price is 50 you’ll buy 20.
- And when the price is 125, you’ll buy 8 shares.
Now, let’s see what happens when the stock price takes the following values: 100, 50, 100.
Your average price is: (100 x 10 + 50 x 20 + 100 x 10) / (10 + 20 + 10) = (1000 + 1000 + 1000) / 40 = 75
So, you win (100 – 75) x 40 = 1000
Cool! But it’s not always a good investing strategy. Let’s see why.
What’s bad with the Dollar Cost Averaging strategy?
To be able to win money with the Dollar Cost Averaging, prices need to stay level or to rise. If prices go down, you are loosing money. See this picture:
In the case where the price take time to go up, you’re loosing money. So, the important rule is:
- do not invest in Dollar Cost Averaging on stocks that continually go down.
Finally, you can use another strategy…
The Improved Dollar Cost Averaging strategy
So, with Improved Dollar Cost Averaging, you invest not regularly, and when prices may be high. You invest when the prices meet a bottom. A global bottom or a local bottom.
Let’s see an example. Take NVidia. In weekly, do not invest when there is a down trend. But when the reversal comes, you may invest.
First: select an uptrend
You must invest when the prices are not strongly going down. It’s the first rule! So, we can use the FTABoll Indicator and wait for a new Safe Zone (green zone). Or it must be positive.
Second: find bottoms in the uptrend
Then when in uptrend, you can use the daily timeframe to find bottoms and invest in these bottoms. The A7 indicator is the solution with it’s black crosses:
On the A7 indicator, the black crosses give potential bottoms. It must be (preferentially) used when the FTABoll is positive or in a FTABoll Safe Zone on a higher time frame. The black crosses are very powerful when used outside of strong bearish markets.
What are the benefits of the Improved Dollar Cost Averaging strategy?
Mainly, by investing in bottoms, the improved DCA lowers you average price of acquisition. So, your probability of getting profitable is higher.
It means that you don’t lose time and avoid having stuck money that do not produce price appreciation.
In fact, even the best assets have bad times when prices go down during days, weeks or even months. Don’t lose time and money in these periods.
How to apply Improved DCA?
You can apply IDCA on a list of growth values. You know Microsoft, NVidia, but at some times they can stall, while others go ahead. I’ve build a list of more than 100 growth values that you can find here. This list is perfect to apply Improved Dollar Cost Averaging, or simple DCA.
Illustrations : canva & Charts: TradingView