Dollar Cost Averaging: Strategies & Examples

Let's look at what the Dollar-Cost Averaging plan is, how it works in different markets, and when you still might need a little more flexible approach.

» Are you a trading newbie? Here's 6 easy steps to start trading stocks.

What Is a Dollar-Cost Averaging Plan?

This method reduces average costs by taking advantage of any dips in the price.

So, if there is a market turmoil similar to the 2020 pandemic-induced meltdown or the 2022 bear market, you could be buying at potentially record lows.

Eventually, DCA allows investors to handle enormous volatility in the security.

» Find out how geopolitical events shape and influence market volatility.

Dollar-Cost Averaging Approach in Different Types of Markets

Let's look at how the DCA approach works in falling, rising, and flat markets.

1. Falling Market

It can be easy to sell when the financial markets are tanking by triple-digit levels every other trading session. But, you could also take the opposite and seemingly counterintuitive approach—buying the dip.

This is comparable to a lump-sum strategy of purchasing $500 of the equity each month, rather than sporadically throughout the trading month.

Let's say you decide to invest $100 in shares each month. In case of a falling market, the breakdown might look like this:

Over the course of 4 months, you'd still have bought 30 stocks, at the average price of $13.33.

It might seem counterintuitive to build your stake in stocks when the market is rallying. But if you are bullish on a company's future and ignore all the noise, any time is a good time.

The risks of using dollar-cost averaging in a falling market include:

• You could end up buying shares at higher prices,
• If the market rebounds quickly, you'll miss out on potential gains,
• DCA is not a protection against losses in declining markets.

Of course, if you do not want to buy shares at all-time highs, you can always take a step back, delay purchase, and restart when the stock is trending downward.

Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of instruments themselves. All the information in this blog is purely educational and should NOT be considered advice.

2. Rising Market

Who wants to buy in a rising market? You can feel like you are bound to suffer losses in the short term when there is a direction reversal.

However, if you assess the market from a wider time frame, you will notice that stocks generally increase over a long-term horizon.

Let's illustrate this with Apple Inc. stock, which has been rising overall for some time.



We will take stocks from February 2023 to January 2024, and invest every 15th of the month, buying a single stock each month. If the 15th is the weekend, the investment is made the next working day.

The price breakdown would look like this:

Dividing the sum total by 12 months, the average cost of a single stock is:

Considering that the peak during the year was in December at $198.11, the price above means you could dollar-cost average even during an upward market.

Disclaimer: This blog post serves as an explanation of the general process of Dollar Cost Averaging and is not meant to be considered as advice.



3. Flat Market

Many traders—even seasoned ones—make the mistake of trying to time the market. Anything can happen in any given session.

» Discover 4 strategies to keep trading during flat markets.

How to Calculate Dollar Cost Averaging

Your brokerage account will automatically calculate your average price for the stock.

You can also simply determine the average price per paid stock. Insert the amount you have invested so far divided by the number of shares owned:

» Struggling to decide on stocks? Use CFD technical analysis for better trading decisions.



Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of instruments themselves. All the information in this blog is purely educational and should NOT be considered advice.

When to Avoid Dollar-Cost Averaging Strategy

The DCA strategy may be a good choice for smaller investors because it eliminates emotional trading and streamlines the trading process.

Bigger investors especially might benefit from the flexible DCA strategy where you set aside the amount of money you want to invest, but still monitor the market and enter with price dips or a predetermined price range.

» Arm yourself against emotional trading with psychology of trading for better investments.

Smart Distribution

If you're just starting as a trader or you're a smaller investor, Dollar-Cost Averaging plan could be a good way to eliminate emotional trading and optimize losses.

On the other hand, dollar-cost averaging does not protect against losses in a declining market and it may result in higher transaction costs. Not to mention you could potentially buy more shares at higher prices.

If you're a more experienced trading professional, you might try DCA combined with market timing and a lump-sum plan. This still gives you some flexibility without overwhelming you with decisions.

The choice ultimately depends on your financial goals and risk management strategies. As always, before even getting into trading, make sure to do due diligence and consult with a financial advisor.