Can one use dollar cost averaging to make money with something highly volatile?
As you mentioned in the title, what you're asking about comes down to volatility.  DCA when purchasing stock is one way of dealing with volatility, but it's only profitable if the financial instrument can be sold higher than your sunk costs.  Issues to be concerned with: Let's suppose you're buying a stock listed on the NYSE called FOO (this is a completely fake example).  Over the last six days, the average value of this stock was exactly $1.00Note 1.  Over six trading days you put $100 per day into this stockNote 2: At market close on January 11th, you have 616 shares of FOO.  You paid $596.29 for it, so your average cost (before fees) is: $596.29 / 616 = $0.97 per share Let's look at this including your trading fees: ($596.29 + $30) / 616 = $1.01 per share. When the market opens on January 12th, the quote on FOO could be anything.  Patents, customer wins, wars, politics, lawsuits, press coverage, etc... could cause the value of FOO to fluctuate.  So, let's just roll with the assumption that past performance is consistent: Selling FOO at $0.80 nets: (616 * $0.80 - $5) - ($596.29 + $30) =  $123.49 Loss Selling FOO at $1.20 nets: (616 * $1.20 - $5) - ($596.29 + $30) =  $107.90 Profit Every day that you keep trading FOO, those numbers get bigger (assuming FOO is a constant value).  Also remember, even if FOO never changes its average value and volatility, your recoverable profits shrink with each transaction because you pay $5 in fees for every one. Speaking from experience, it is very easy to paper trade.  It is a lot harder when you're looking at the ticker all day when FOO has been $0.80 - $0.90 for the past four days (and you're $300 under water on a $1000 portfolio).  Now your mind starts playing nasty games with you. If you decide to try this, let me give you some free advice: Unless you have some research (such as support / resistance information) or data on why FOO is a good buy at this price, let's be honest: you're gambling with DCA, not trading. END NOTES: if you know when and by how much something will fluctuate, you can always make money. Buy it when it's cheaper and sell it when it's more expensive. If you just know that it fluctuated a lot recently, then you don't know what it will do next. Most securities that go to zero or go much higher bounce all over the place for a while first.  But you don't know when they'll move decisively lower or higher.  So how could you figure out if you'll make money - you can't know. DCA will on average make you better off, unless the extra commissions are too high relative to your purchase sizes. But it will in retrospect make you worse off in many particular cases. This is true of many investment disciplines, such as rebalancing. They are all based on averages.  If the volatility is random then on average you can buy more shares when the price is lower using DCA. But when the lowest price turns out to have been on a certain day, you'd have been better off with a single lump sum put in on that day. No way to know in advance.  Degree of volatility shouldn't matter; any fluctuation is enough for DCA or rebalancing to get you ahead, though it's true they get you ahead farther if the fluctuations are larger, since there's then more difference between DCA and a lump purchase.  I think the real reason to do DCA and rebalancing is risk control. They reduce the risk of putting a whole lump sum in on exactly the wrong day. And they can help keep a portfolio growing even if the market is stagnant. That doesn't sound like dollar cost averaging. That sounds like a form of day trading. Dollar cost averaging is how most people add money to their 401K, or how they add money to some IRA accounts. You are proposing a form of day trading. Dollar cost averaging is beneficial if you don't have the money to make large investments but are able to add to your holding over time. If you can buy the same monetary amount at regular intervals over time, your average cost per share will be lower than the stock's average value over that time. This won't necessarily get you the best price, but it will get you, on the whole, a good price and will enable you to increase your holdings over time. If you're doing frequent trading on a highly volatile stock, you don't want to use this method. A better strategy is to buy the dips: Know the range, and place limit orders toward the bottom of the range. Then place limit orders to sell toward the high end of the range. If you do it right, you might be able to build up enough money to buy and sell increasing numbers of shares over time. But like any frequent trader, you'll have to deal with transaction fees; you'll need to be sure the fees don't eat all your profit.
Its the relative leverage available to retail traders between the two.  In the US one can trade equities with 2:1 leverage while with commodities the leverage can go much higher.  Combine this with the highly volatile nature of commodities, and it makes losing BIG too easy for the average trader. "When you hear advice to buy index funds, that usually comes with two additional pieces of investment discipline advice that are important: These two elements are important to give you relative predictability in your outcome 20 years from now.  In this old blog post of mine I linked to Warren Buffett talking about this, also  mentioned it in a comment on another answer: http://blog.ometer.com/2008/03/27/index-funds/ It's perfectly plausible to do poorly over 20 years if you buy 100% stocks at once, without dollar-cost averaging or rebalancing. It's very very very plausible to do poorly over 10 years, such as the last 10 in fact. Can you really say you know your financial situation in 20-30 years, and for sure won't need that money? Because predictability is important, I like buying a balanced fund and not ""pure stocks"": http://blog.ometer.com/2010/11/10/take-risks-in-life-for-savings-choose-a-balanced-fund/ (feel a little bad linking to my blog, but retyping all that into this answer seems dumb!) Here's another tip. You can go one step past dollar cost averaging and try value averaging: http://www.amazon.com/Value-Averaging-Strategy-Investment-Classics/dp/0470049774 However, chances are you aren't even going to be good about rebalancing if it's done ""by hand,"" so personally I would not do value averaging unless you can find either a fund or a financial advisor to do it for you automatically. (Finance Buff blog makes a case for a financial advisor, in case you like that more than my balanced fund suggestion: http://thefinancebuff.com/the-average-investor-should-use-an-investment-advisor-how-to-find-one.html) Like rebalancing, value averaging makes you buy more when you're depressed about the market and less when it's exciting. It's hard.  (Dollar cost averaging is easily done by setting up automatic investment, of course, so you don't have to do it manually in the way you would with value averaging.) If you read the usual canonical books on index funds and efficient markets it's easy to remember the takeaway that nobody knows whether the market will go up or down, and yes you won't successfully time the market. But what you can do successfully is use an investment discipline with risk control: assume that the market will fluctuate, that both up and down are likely and possible, and optimize for predictability in light of that. Most importantly, optimize to take your emotions and behavior out of the picture. Some disciplines for example are: there are dozens out there, many of them snake oil, I think these I mentioned are valid. Anyway, you need some form of risk control, and putting all your money in stocks at once doesn't give you a lot of risk control. There's no real need to get creative. A balanced fund that uses index funds for equity and bond portions is a great choice." "Being ""Long"" something means you own it.  Being ""Short"" something means you have created an obligation that you have sold to someone else.  If I am long 100 shares of MSFT, that means that I possess 100 shares of MSFT.  If I am short 100 shares of MSFT, that means that my broker let me borrow 100 shares of MSFT, and I chose to sell them.  While I am short 100 shares of MSFT, I owe 100 shares of MSFT to my broker whenever he demands them back.  Until he demands them back, I owe interest on the value of those 100 shares.  You short a stock when you feel it is about to drop in price.  The idea there is that if MSFT is at $50 and I short it, I borrow 100 shares from my broker and sell for $5000.  If MSFT falls to $48 the next day, I buy back the 100 shares and give them back to my broker.  I pocket the difference ($50 - $48 = $2/share x 100 shares = $200), minus interest owed.  Call and Put options.  People manage the risk of owning a stock or speculate on the future move of a stock by buying and selling calls and puts.  Call and Put options have 3 important components.  The stock symbol they are actionable against (MSFT in this case), the ""strike price"" - $52 in this case, and an expiration, June.  If you buy a MSFT June $52 Call, you are buying the right to purchase MSFT stock before June options expiration (3rd Saturday of the month).  They are priced per share (let's say this one cost $0.10/share), and sold in 100 share blocks called a ""contract"".  If you buy 1 MSFT June $52 call in this scenario, it would cost you 100 shares x $0.10/share = $10.  If you own this call and the stock spikes to $56 before June, you may exercise your right to purchase this stock (for $52), then immediately sell the stock (at the current price of $56) for a profit of $4 / share ($400 in this case), minus commissions.  This is an overly simplified view of this transaction, as this rarely happens, but I have explained it so you understand the value of the option.  Typically the exercise of the option is not used, but the option is sold to another party for an equivalent value.  You can also sell a Call.  Let's say you own 100 shares of MSFT and you would like to make an extra $0.10 a share because you DON'T think the stock price will be up to $52/share by the end of June.  So you go to your online brokerage and sell one contract, and receive the $0.10 premium per share, being $10.  If the end of June comes and nobody exercises the option you sold, you get to keep the $10 as pure profit (minus commission)!  If they do exercise their option, your broker makes you sell your 100 shares of MSFT to that party for the $52 price.  If the stock shot up to $56, you don't get to gain from that price move, as you have already committed to selling it to somebody at the $52 price.  Again, this exercise scenario is overly simplified, but you should understand the process.  A Put is the opposite of a Call.  If you own 100 shares of MSFT, and you fear a fall in price, you may buy a PUT with a strike price at your threshold of pain.  You might buy a $48 June MSFT Put because you fear the stock falling before June.  If the stock does fall below the $48, you are guaranteed that somebody will buy yours at $48, limiting your loss.  You will have paid a premium for this right (maybe $0.52/share for example).  If the stock never gets down to $48 at the end of June, your option to sell is then worthless, as who would sell their stock at $48 when the market will pay you more?  Owning a Put can be treated like owning insurance on the stock from a loss in stock price.  Alternatively, if you think there is no way possible it will get down to $48 before the end of June, you may SELL a $48 MSFT June Put.  HOWEVER, if the stock does dip down below $48, somebody will exercise their option and force you to buy their stock for $48.  Imagine a scenario that MSFT drops to $30 on some drastically terrible news.  While everybody else may buy the stock at $30, you are obligated to buy shares for $48.  Not good!  When you sold the option, somebody paid you a premium for buying that right from you.  Often times you will always keep this premium.  Sometimes though, you will have to buy a stock at a steep price compared to market.  Now options strategies are combinations of buying and selling calls and puts on the same stock.  Example -- I could buy a $52 MSFT June Call, and sell a $55 MSFT June Call.  I would pay money for the $52 Call that I am long, and receive money for the $55 Call that I am short.  The money I receive from the short $55 Call helps offset the cost of buying the $52 Call.  If the stock were to go up, I would enjoy the profit within in $52-$55 range, essentially, maxing out my profit at $3/share - what the long/short call spread cost me.  There are dozens of strategies of mixing and matching long and short calls and puts depending on what you expect the stock to do, and what you want to profit or protect yourself from.  A derivative is any financial device that is derived from some other factor.  Options are one of the most simple types of derivatives.  The value of the option is derived from the real stock price.  Bingo?  That's a derivative.  Lotto?  That is also a derivative.  Power companies buy weather derivatives to hedge their energy requirements.  There are people selling derivatives based on the number of sunny days in Omaha.  Remember those calls and puts on stock prices?  There are people that sell calls and puts based on the number of sunny days in Omaha.  Sounds kind of ridiculous -- but now imagine that you are a solar power company that gets ""free"" electricity from the sun and they sell that to their customers.  On cloudy days, the solar power company is still on the hook to provide energy to their customers, but they must buy it from a more expensive source.  If they own the ""Sunny Days in Omaha"" derivative, they can make money for every cloudy day over the annual average, thus, hedging their obligation for providing more expensive electricity on cloudy days.  For that derivative to work, somebody in the derivative market puts a price on what he believes the odds are of too many cloudy days happening, and somebody who wants to protect his interests from an over abundance of cloudy days purchases this derivative.  The energy company buying this derivative has a known cost for the cost of the derivative and works this into their business model.  Knowing that they will be compensated for any excessive cloudy days allows them to stabilize their pricing and reduce their risk.  The person selling the derivative profits if the number of sunny days is higher than average.  The people selling these types of derivatives study the weather in order to make their offers appropriately.  This particular example is a fictitious one (I don't believe there is a derivative called ""Sunny days in Omaha""), but the concept is real, and the derivatives are based on anything from sunny days, to BLS unemployment statistics, to the apartment vacancy rate of NYC, to the cost of a gallon of milk in Maine.  For every situation, somebody is looking to protect themselves from something, and somebody else believes they can profit from it.  Now these examples are highly simplified, many derivatives are highly technical, comprised of multiple indicators as a part of its risk profile, and extremely difficult to explain.  These things might sound ridiculous, but if you ran a lemonade stand in Omaha, that sunny days derivative just might be your best friend..." "From Wikipedia: Usage Because EV is a capital structure-neutral metric, it is useful when   comparing companies with diverse capital structures. Price/earnings   ratios, for example, will be significantly more volatile in companies   that are highly leveraged. Stock market investors use EV/EBITDA to compare returns between   equivalent companies on a risk-adjusted basis. They can then   superimpose their own choice of debt levels. In practice, equity   investors may have difficulty accurately assessing EV if they do not   have access to the market quotations of the company debt. It is not   sufficient to substitute the book value of the debt because a) the   market interest rates may have changed, and b) the market's perception   of the risk of the loan may have changed since the debt was issued.   Remember, the point of EV is to neutralize the different risks, and   costs of different capital structures. Buyers of controlling interests in a business use EV to compare   returns between businesses, as above. They also use the EV valuation   (or a debt free cash free valuation) to determine how much to pay for   the whole entity (not just the equity). They may want to change the   capital structure once in control. Technical considerations Data availability Unlike market capitalization, where both the market price and the   outstanding number of shares in issue are readily available and easy   to find, it is virtually impossible to calculate an EV without making   a number of adjustments to published data, including often subjective   estimations of value: In practice, EV calculations rely on reasonable estimates of the   market value of these components. For example, in many professional   valuations: Avoiding temporal mismatches When using valuation multiples such as EV/EBITDA and EV/EBIT, the   numerator should correspond to the denominator. The EV should,   therefore, correspond to the market value of the assets that were used   to generate the profits in question, excluding assets acquired (and   including assets disposed) during a different financial reporting   period. This requires restating EV for any mergers and acquisitions   (whether paid in cash or equity), significant capital investments or   significant changes in working capital occurring after or during the   reporting period being examined. Ideally, multiples should be   calculated using the market value of the weighted average capital   employed of the company during the comparable financial period. When calculating multiples over different time periods (e.g. historic   multiples vs forward multiples), EV should be adjusted to reflect the   weighted average invested capital of the company in each period. In your question, you stated: The Market Cap is driven by the share price and the share price is   determined by buyers and sellers who have access to data on cash and   debts and factor that into their decision to buy or sell. Note the first point under ""Technical Considerations"" there and you will see that the ""access to data on cash and debts"" isn't quite accurate here so that is worth noting. As for alternatives, there are many other price ratios one could use such as price/earnings, price/book value, price/sales and others depending on how one wants to model the company. The better question is what kind of investing strategy is one wanting to use where there are probably hundreds of strategies at least. Let's take Apple as an example. Back on April 23, 2014 they announced earnings through March 29, 2014 which is nearly a month old when it was announced. Now a month later, one would have to estimate what changes would be made to things there. Thus, getting accurate real-time values isn't realistic. Discounted Cash Flow is another approach one can take of valuing a company in terms of its future earnings computed back to a present day lump sum." "I have to seriously disagree with this. Automated news analysis may have not worked for you for a variety of reasons (most likely all related to infrastructure/software inexperience), but it works and some shops and funds have made fortunes just doing news based automated trading.  I have personal experience working in a Chicago shop which went through a few off the shelf solutions, like [Ravenpack](http://ravenpack.com/services/rpna_dj.htm) before rolling a custom news analytics platform which integrated with quantitative strategies to move a lot of volume.  The whole premise of your post just seems very off to me. ""The problem that arises is that it is nearly impossible to make money off of automating trades."" -- an entire segment of the industry would like to have a word with you." Late to the party, but it's just improving your cost basis in a defined risk trade even further. If you want to put up less risk capital but want to test the waters, this can be one way to do it. Another could be buying cheap OTM butterflies or financing a further otm option with the basis reduction from the debit spread if you want to gamble a bit further and venture into 15-20 delta positions. Usually, I am doing debit spreads with a buying atm and selling a couple strikes further otm or at least at the most liquid strikes, but if it's a high flier, it can be disappointing, but a good trade. If you're more of a contrarian in where you buy your calls/puts, it's absolutely a good way to lessen your risk on a calculated bet. It depends what you mean by 'gain'. Over long period of times the market increases so using a blind monkey with a dart or index fund should be sufficient to get an average returns. The key difference is that changes in currency are close to zero sum game while money in equity or bonds is actually used for something (building a company etc.). If you mean 'get above average returns' then you will likely get answers depending on person. If you think that markets are efficient then you won't beat the market consistently - over long periods the returns are likely to be no better then average - because of large number of 'smart people' trying to beat each other (and even them are likely to have below-average returns). If you don't think so then it is possible to get above average consistently - as long as you know how to beat those 'smart people'. Let's consider that transaction cost is 0(zero) for calculation. In the scenario you have stated, maximum profit that could be made is 55$, however risk is unlimited. Hedging can also be used to limit your losses, let's consider this scenario. Stock ABC trading @ 100$, I'll buy the stock ABC @ 100$ and buy a put option of ABC @ strike price 90$ for a premium of 5$ with an expiration date of 1 month. Possible outcomes I end up in a loss in 3 out of 4 scenarios, however my loss is limited to 15$, whereas profit is unlimited.