Lesson 1 of 6 · 8 min

Types of approach: trend, mean reversion, holding and DCA

There is no best approach, only the one you can follow consistently and whose difficult stretches you understand. Every approach has periods in which it loses. If you know that in advance, you are less likely to abandon it at the worst possible moment.

Four approaches

• Trend following: you enter once a trend is confirmed and stay until it weakens. It struggles in a market with no direction, where small losses pile up. It usually has a lower hit rate and occasionally a larger win.
• Mean reversion: you expect the price to come back after an excessive move. It struggles when a strong trend simply keeps going. It often has many small wins and rare larger losses, which makes the stop especially important.
• Long-term holding: you buy an asset for which you have a multi-year reason. It takes little time, but it demands that you can sit through large drops. A project can also fail for good.
• Regular buying (DCA, dollar-cost averaging): the same amount at equal intervals, whatever the price. It removes the pressure of picking the moment, but it does not protect you from a long decline in the asset.

DCA in numbers

See this on the real history of Bitcoin, without fees. Change the period and the monthly amount, then compare regular buying with a lump sum. Remember that Bitcoin survived in this data and is not representative of the thousands of tokens that did not.

How to choose

• Time: do you have half an hour a week or two hours a day? Short-term approaches demand constant work.
• Risk tolerance: which bothers you more, a string of small losses or a rare large drop?
• Combination: you can separate a long-term part from a smaller trading part, with clearly separate rules and accounts.
• Simplicity: to start, choose just one active approach on one or two markets.