Averaging, Scaling, and Laddering Buy / Sell Orders in Crypto Trading (More Generally Incremental Buying and Selling to Create Long and Short Positions)
Dollar cost averaging, value cost averaging, scaling in and out of positions, and laddering buy and sell orders are all simple investing and trading strategies. In each case you avoid going all-in or all-out, and instead scale in and out of positions.
- Averaging (creating an average position): Buying the average price of an asset over time (or selling the average price over time). There are different versions of averaging into a position, here I’m broadly referring to any tactic that involves scaling into a position (dollar cost averaging, where you buy an equal dollar amount in regular intervals, and value cost averaging, buying / selling to ensure a target dollar amount, are two examples of averaging strategies).
- Laddering (incrementally moving in and out of positions): Instead of buying or selling at a single price, one would set incremental buy / sell limit orders up and down the order book, buying when the price goes down and selling when the price goes up.
- Scaling: Instead of buying into a position or selling a position all at once, you gradually scale in or out. Both averaging and laddering have you “scaling” into positions.
All of these similar tactics, averaging, scaling, and ladder, can be used to buy and sell incrementally (which can be very helpful in a volatile asset class like crypto).
NOTE: To effectively implement the above strategies, you’ll generally want to use limit orders and/or stop orders (so click that link if you need a refresher or an explanation).
TIP: You can use these tactics on long and short positions, and you can use them with stops. If it is an order type, you can average, scale, and ladder it.
How to Average, Scale, and Ladder
Above we covered the basics, and the gist is notably simple. However, the specifics of how to implement specific types of strategies is a little more heady.
With averaging, you can do it a few ways, but traditionally with dollar cost averaging (DCA) you want to spend the same dollar amount every X amount of time. So if I had $1.2k to spend, I’d spend $100 a month, every month on the same day of the month for a year. I would therefore end up with an average price in an asset.
As an alternative version of the DCA strategy, you can break this up to weekly buys, or daily buys, or bi-monthly buys, or aim to buy only on the dips, or to buy based on a careful reading of the charts, or skip months when the price has gone up very high, etc. Or, you could weight your buys toward lower prices and sell off some when prices are high to balance your position toward a target (value averaging).
This sort of incremental buying is very effective for building long positions in crypto due to the volatile nature of the cryptos markets.
With laddering you can ladder any type of order. You can do limit buys and sells or stop buys and sells. Laddering stops can help to limit losses if you open a position another way (learn about laddering stops). Laddering buy orders for lower prices can help you buy the average price on a price dip. Laddering sell orders can ensure you take profits as the price goes up, without having to time the top.
When laddering, you’ll want to look at the price history to find support levels and you’ll want to look at the order book to see where demand is at different price points. If there is a big “buy wall,” you may want to place a buy order before that (same for a “sell wall”). Otherwise, you can take a more advanced approach to finding support and resistance levels to place buys and sells in front of (or stops behind).
The idea here is that instead of buying / selling at the current market price only, you spread your buy-in or sell amount between the current price and the price you think it’ll hit and then ladder orders accordingly.
Here is an example of pairing the two tactics: You buy every week, more when its low, less when it is high. When you go to buy you don’t just hit “market buy,” you split your funds in four parts, 1/4 is a market buy, 1/4 a little under that, 1/4 under that, and 1/4 a low ball order that you expect might not hit. You have now laddered your buys in an effort to create an average position.
You can implement very complex versions of the above strategies, but honestly even a very rudimentary version can do wonders. Trying to time the market with a large market order is asking for trouble. Laddering and cost averaging limits the chances of you messing things up and lets you enjoy price fluctuations.
TIP: It is vital to alway have cash on hand. It is human to overextend as the price goes up and then to become trapped (see FOMO). A proper strategy should result in you always having wiggle room. If and when that 80% correction happens, if you didn’t get any sells in high, you at least want to have cash on hand to average in low.
TIP: Laddering can work well for short term trading. Once your sell orders fill, move them to buy orders to take advantage of the volatility. Once your buy orders fill, more them to sell orders to take advantage or prices increases. In this way you can “trade the volatility” of an asset by laddering in and out of positions over a short period of time.