A Practical Guide to Dynamic DCA + Risk Metric Tier List

Some weeks ago I created a Post, asking why Dynamic DCA was so frowned upon. Turns out, it's not necessarily the case, with a bunch of messages asking for more details on how to use this strategy effectively. I've kept seeing DCA Strategy posts here and there too, so I thought I'd create a quick guide and share a tier list of risk metrics (both free and paid) that everyone can use for dynamic DCA.

Dynamic DCA Explained

Dynamic DCA is about adjusting your investment based on the current market conditions. Unlike traditional DCA, dynamic DCA is more flexible. In essence, you try to invest more during bearmarkets and invest less (or exit) during bullmarkets by using metrics / looking at indicators and adjusting the DCA amount based on them.

But why?

When backtesting this approach, it yields much higher returns. At the same time, it helps a ton with the emotional turmoil. Setting a strategy to take profits during bullruns and sticking to it is a godsend when the greed hits. It also helps with the emotional side when DCAing into the market. It feels stupid to DCA the same amount at 15k and 45k. You obviously want to take advantage of changes in the market.

Here's how I do it

1. Select a Risk Metric: This is crucial. A good risk metric helps you understand the current market conditions, whether it’s overbought (high risk) or oversold (low risk). The more accurate the metric, the more powerful your strategy.
2. Set Your Risk Thresholds: Decide the risk levels at which you'll invest more, do nothing, or even sell. For example, I start investing when risk goes below 45 and increase the amount I DCA each week in steps of 5. So I'll invest 100$ at 45 risk, 150$ at 40 risk and so on - and start DCAing out of the market starting at 75 risk and above in the same manner.
3. Stick to it: Keep an eye on the risk metric each time your DCA time comes around and adjust your investment amounts accordingly.

Now, onto the tier list of risk metrics. This list is based on my personal experience and research:

S Tier

• AlphaSquared's Risk Metric (AlphaSquared): My go-to metric. It nailed the Bitcoin and Ethereum bear market bottoms in June and November 2022. It also offers strategy builders and forward-testing simulations.
• Benjamin Cowen's Risk Indicator (IntoTheCryptoVerse): Solid choice with a wide range of metrics and a build-your-own-chart workbench. It's pricey, but if you can afford it, it’s worth a shot.

A Tier

• CoinTalksCrypto's Bitcoin Bull Run Index (CBBI): Free and customizable. It missed some key market moves and the model was retrofitted so it didn't actually nail either the 2021 top or the 2022 bottom (they omit this fact, but you can check the real historical performance on web.archive.org) but it's decent for a free tool.

B Tier

• Bitcoin Risk Level (Bitstack)
• LookIntoBitcoin's Reserve Risk (LookIntoBitcoin)
• TradingView Scripts mimicking Benjamin Cowen's model. There are a ton.

C Tier

• Fear and Greed Index (Alternative.me): More of a sentiment gauge than a risk metric. I find it less useful for dynamic DCA.

That's it! Remember, dynamic DCA isn't about timing the market perfectly. It's about making informed decisions based on market conditions. You adjust your investments based on the market state, as you should.

Feel free to share your experiences or any other tools you find useful for dynamic DCA.