The investing technique called the ‘Shotgun Effect’ is a term I coined for a method I have used to increase my profits. It attacks a common investor issue and ultimately, gives stock market investors flexibility to maneuver. The ‘Shotgun Effect’ comes from the idea that no investor is going to perfectly time the market or any individual stock. Even when buying at a technical level, such as a gap fill or double bottom, the idea that it will be the exact low is comical. Charts cross below key levels, even if briefly, before rebounding. This is usually caused by fear or greed in the name that drives a stock one way or the other, further than expected. An investor that goes ‘all in’ at a specific level almost always gets a worse price than one that uses the ‘Shotgun’ method.
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When an investor buys a stock or even shorts a stock, there is only a 10% chance they will nail the low within 3%. ‘Shotgun Effect’ uses that knowledge to tell investors to buy a half position or a third of a position at the first level, allowing for additional entries below at the next technical level. Essentially, Dollar cost averaging but with a plan. Think of a bullet. When you shoot a bullet at a wall it likely goes through. But if there were a second wall or a third wall behind, it will likely. By buying at the first level, you get your toe in the water, just in case the stock pops right back up. The next entry if needed, will likely be the right one, and the average entry will be fantastic for the bounce. When the bounce comes, the investor with the two entries has a much better chance of maximizing profit than the investor who just went all in at the first entry. In many cases, the investor that entered fully at the first level will be lucky to break even, while the investor that used the ‘Shotgun Effect’ can bank solid money.
Note the REAL LIFE Trade Using The ‘Shotgun Effect’ below: