09 Nov The Power of Dollar Cost Averaging
The Power of Dollar Cost Averaging
Nov. 9, 2022
As much as I malign buy-and-hold index fund investing (and rightfully so), the evidence shows that Dollar Cost Averaging (DCA) can be a powerful tool.
But not for the reasons index funders think.
It doesn’t work because the stock market always goes up and you can’t time the market.
It works because it forces us to commit.
Warren Buffett doesn’t have $100 billion because he trades a superior strategy. He has $100 billion because he’s the most committed investor we’ve ever seen. Ninety-nine percent of Buffett’s wealth has come after he turned 65 years old. For over 40 years, there was nothing super special about his results. Many, many funds can reproduce Warren’s returns over a 20-year period. If you take out the funds’ exorbitant fees, they’re practically identical.
No, the difference between hobby trading and life-changing trading is commitment.
And DCA is a commitment-making tool.
If we decide to add money to our account each month, we’re all-in. We’re not waiting-and-seeing. We’re adding and pressing on without fear.
How could DCA work with a trading strategy? Here’s an example using the 60M Turtle Strategy on the GJPY in 2022:
As you can see on the spreadsheet, I hypothetically started with $600. Then I added $100 each month, win or lose. For each trade, I risked 5%.
By doing this, I hypothetically ended up with $3,800 while investing only $1,600 total ($600 to start and $100 a month for ten months).
Are there losing months? Of course.
But DCA traders love losing months because adding on a losing month means next month’s trade size will be bigger than it would have been if they had done nothing.
If the month after a loser is profitable, then DCA traders make more because they had more size in play.
By committing, DCA traders are in bigger size when the big months occur, and they’re risking less than if they had all their money on the table at the start.
In our next Newsletter, we’ll look at a longer-term system. DCA definitely works better with more trades.
We’ll see how it goes.
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.