Transcription
What's up everyone? All right, so the topic of today's episode, bare market strategies. The market has cooled off quite a bit. It began with the crypto markets rolling over a few months ago, and there's been a correlation between how the crypto markets perform and how other speculative markets perform. Trading in the small cap market is no doubt a speculative asset class. It's a speculative market. And so we've seen that volatility has reduced. Without volatility, there's not as much opportunity. And I want to talk a little bit about my bare market strategy and a phenomenon that I've seen among many seasoned traders over the years. So let's begin by talking about market cycles.
Here's something that I noticed in 2019. As you may know, all brokers went to commission-free trading. That is all retail traditional retail brokers including at the time TD Ameritrade, E*TRADE, Fidelity, Schwab. Eventually Schwab and TD merged. Uh, Robinhood was already commission-free, but really what ended up uh becoming the catalyst was Schwab going commission-free. And we know now that they did it in order to make everyone else go commission-free so that they could buy out TD Ameritrade because without commissions TD Ameritrade wouldn't be making as much money and so Schwab was able to buy them out and it was really kind of an interesting way of taking them out at the legs and then buying the business. So that occurred in 2019 just a few months before the pandemic began.
When the pandemic began, as you certainly likely recall, there was a lockdown and people couldn't go to work except for essential workers. But a lot of people were home on unemployment and many of them were actually bringing in a pretty decent amount of money on unemployment and then they had all day to hang out. So, because they had all day to do as they'd like and because all sports were cancelled, people were looking for something else to tune into. And a lot of people started tuning into the market, especially as word spread that the markets were rallying higher. And we were experiencing the beginning of a bull market, which was a little bit surprising since the initial response to the lockdown was that the S&P 500 dropped nearly 30% in 3 weeks, but then it roared back up. And so as traders came into the market in 2020, many of them experienced what we could probably today call beginner's luck. They put 20,000 shares on a stock, it goes up $4 a share, they're up 80 grand. They put 25,000 shares on another stock, it goes up $4 a share, they're up 100 grand. And day after day after day, people are booking huge profits. And I was no exception. I made over $5 million in 2020.
For those of you guys tuning in perhaps for the first time, let me introduce myself. My name is Ross Cameron. I'm a full-time trader, and I took my first trades with real money in 2001, more than 25 years ago. I didn't make my first million dollars in the market, however, until the spring of 2019. So, I paid my dues, a lot of years of trial and error, periods of time where I gave up completely and then I came back years later. And so what I experienced in 2020 was the best trading that I had ever had in my whole life. It was unprecedented. And that continued into 2021. And so I knew a lot of traders during that period of time that made millions of dollars.
But what happened in 2022? The Federal Reserve decided it was time for a bare market. And they pressed the bare market button. How did they do that? It was by jacking up interest rates. They jacked up interest rates at an unprecedented level. They jacked not that the price of the interest rate was particularly unprecedented, but the rate at which interest rates climbed very rapidly. Interest rates went up to tame and slow down inflation. And it's very interesting because the Federal Reserve essentially has these throttles that they can use to speed up the economy or to cool off the economy to create a bull market or create a bare market. And they decided it was time for a bare market. It was time for some of us to lose our jobs. And so as the bare market set in, what we noticed was all of a sudden equities were not moving as much as they were prior. The volatility compressed and oh, don't forget FTX collapsed. Crypto markets imploded. And of course, if crypto markets had kept going higher, FTX the collapse may not have happened. They may not have even been exposed. Eventually might have, but who knows? Maybe it would have been exposed just in the last few months as the crypto markets have dropped 50%. But because the markets dropped all of a sudden what happened there was exposed and so crypto markets dropped. Other speculative asset classes dropped and we saw a bare market in the small cap space.
2023 was the coldest year I had had in about 10 years. It was very cold and I was shocked at how I had been able to make $5 million in 2020 and then in 2023 I wasn't even able to break a million dollars which I know first world problems but to me it caught me by surprise and I had um been pretty thoughtful about not increasing my cost of living too much to the profits of 2020 and 2021 but nonetheless when things cooled off I was a bit concerned. So come 2024, the market picks back up. That was fine. But in 2023, what happened for a lot of the traders who had been very successful during 2020 and 2021 was I started losing money. Now I still made money and I think that's because I learned to trade during a bare market. That's when I learned to trade. And so I have a bare market strategy inherently that I trade every day. So I could do well in a bare market and I can crush it in a bull market. But people who joined the market when it was a bull market only learned how to trade during a bull market. And in fact, they picked up some habits that don't serve you very well when the market cools off. One of those habits, for instance, is averaging down, buying stocks that are weak, expecting that they will go higher. So, buying it as it drops, adding more as it drops, adding more as it drops. In a bull market, a lot of these stocks that are highly volatile will drop down and they will rally back up. So, you can get away with buying these really deep dips and you'll get a bounce back up. But in a bare market, they keep going lower. So, that doesn't work.
In a bare market, you have to be much more precise about your entries and your exits. In a bull market, you buy, most stocks are going up, and you can sell higher a little bit later. You may suffer a little pain as it dips down before it goes higher, but your entries can be a little bit more sloppy. Your exits can be a little bit more sloppy. Bare markets, however, is all about precision, timing your entries and timing your exits to be the most efficient that you can, efficiency. So, I would say some of those traders who came into the market during the pandemic were not as efficient and they didn't need to be as efficient in their production of profits per share because the market was so hot. But during a bare market, it's different. So, let's talk about what we have to do differently during a bare market. What changes in my strategy when the market cools down?
The first thing that I would say is that I have to reduce my position sizes. This is a blessing and curse of the market. When the market is hot, there's more traders participating because there's more volatility, there's bigger moves, and you can buy more shares. You can get in with 25,000 shares like that without much slippage at all. So, you're getting in with bigger positions, you can get bigger profits. But when the market cools off, what you'll notice is that same 25,000 share order, which previously gave you no slippage, is suddenly giving you 5 cents of slippage, 10 cents of slippage, maybe even 20 cents of slippage. 20 cents of slippage on 25,000 shares is $5,000 of slippage. If you got $5,000 of slippage when you bought, and you got another $5,000 of slippage when you sell, you're losing 10 grand on slippage. And if that trade in a bull market was a $5,000 winner, well, that same trade when you add in the slippage in a bare market is a $5,000 loser, right? So during a bull market, you could trade with bigger size, you can get higher quantity of trades. But in a bare market, you've got to reduce your size because there's less volatility, there's less liquidity, and you can't buy as many shares without getting slippage. So you've got to bring your share size down. That's your first step.
Your second step is you can't take as many trades. There won't be as many A-quality setups. And even A-quality setups, stocks that meet all five pillars of stock selection won't resolve as well in a bare market as that same exact setup with that same exact headline would in a bull market. And that is very confusing for a lot of traders. It's the exact same. How do you understand the difference? The difference is the market sentiment. And it makes all the difference. So, for those of you guys that aren't familiar with my five pillars of stock selection, and for those perhaps are interested in learning more about my bare market strategy, I will put links. They'll be pinned at the top of the comments and in the description where you can check them out. You can download them and you can utilize these resources as you'd like. They are designed for beginner traders who are trying to rein it in, who no longer want to trade haphazardly, doing a little of this, a little of that, but want to instead adopt a system, a strategy, and be focused on following the rules. Success in a bare market requires a high degree of discipline.
So, number one, we've got to reduce our share size. Number two, we've got to reduce the number of trades we're taking. And that means number three, we focus on quality over quantity. Trade the best, leave the rest. Only trading the stocks that meet the five pillars of stock selection. Because here's something I've noticed. When I trade stocks that meet the five pillars of stock selection in a bull market, I only trade those stocks. I can have accuracy upwards of 85%. Even 90%. I can have really high accuracy. Now you might say, "Ross, when I look at your metrics, and I put all my metrics fully transparent on my website. When when I look at your metrics from bare markets, your accuracy is like 65%. When I look at your metrics from bull markets, your accuracy is like 70-72%. It's not 90%." So what are you talking about? Well, this is why. So a quality setups produce 90% accuracy in a bull market. In a bare market, A-quality setups produce 75% accuracy. B-quality setups in a bull market 80% accuracy, in a bare market 65-70% accuracy, it's lower. C-quality setups in a bull market still you can get 65-70% accuracy, 75% in a bare market you will be losing money. And so in a bullish market I will trade A, B, and C quality setups and get a blended average of about 70% accuracy. But in a bearish market I can't trade B and C quality setups. The market is too cold. I can only trade A-quality setups. Even just trading those, my accuracy has dropped down from 72% down into the 60s, 65% sometimes a little lower. And my total quantity of trades has dropped because there just only so many good quality opportunities each, not even just each day, but each week and each month.
So, here's my question for you. Can you be content with trading less right now? This is the good news, and this is something I really want you to think about. Bare markets and bull markets are never forever. There's ups and there's downs. So, it's cold right now, but it won't be cold forever. My question for you is, can you get through this cold market so you can get to the other side? Because if you blow up your account while it's cold, you will never have known if you could have been the trader who would have done really well once the market heats up. So, those traders I talked about before who did really well in a hot market, made millions of dollars, but their strategy may not be well tuned or efficient enough to produce a profit in a bare market, which means they're very successful when it's hot, and they can't make money when it's cold. As long as they can take their foot off the gas quickly when it's cold, and they have either the earnings from when it was hot to tide them over during the cold stretch, or they have additional sources of income, they will be fine. Trade when it's hot, foot off the gas when it's cold, come back when it's hot again.
Now, in a perfect world, you'd like to get to the place that during a bare market, you're not losing money. And right now, during bare markets, I don't lose money. I make about a fifth, sometimes less, sometimes even only 10% of what I make in a hot market, but I still make money. You want to get to that place. If you can make money when it's cold, then when the market heats up, you can do exceptionally well. Getting to the point where you can actually make money during a colder market means you've got to be really focused on trading high-quality setups. So, going back to the steps to take to get ready for the bare market. Yes, we want to reduce our share size. We want to reduce the quantity of trades that we're taking every single day. We definitely have to pair things down. We want to focus on quality over quantity. Trade the best. Leave the rest. We also during a bare market need to be aggressive about taking profits quickly. You take your profits off the table. This is the biggest lesson that I learned when I was first trading. When I first got started trading, well, in 2001, for instance, this was more than 25 years ago. The market was totally different than it was today. But after 2010, we had a period of time where electronic digital trading was very popular. A lot of people were day trading. Yet E*TRADE, Ameritrade, all these brokers, but they all charged a commission. And the commission, $10 a trade for many of those brokers. And what did that mean? You were more thoughtful about the trades that you took. You couldn't just punch the button as many times as you want the way you can today. And so, because each trade cost you $10 to buy and $10 to sell, you focused on higher-quality setups. You had to, right? This was a function of the market and the time that we were in. And I'll tell you that if you had a profit, you paid yourself because you saw that if you didn't pay yourself, that would go back to break even. It would even turn into a loser before you knew it. That was a period of time where all you could get were small little slivers. Now, occasionally you get a slightly bigger move, but it was a much cooler market. There was less liquidity. There was less volume. And there were fewer opportunities. And so I bring back that strategy whenever it gets cold. Going back to just shaving 5 cents here, 10 cents there. Yes, I'd like to get 20 cents per share. 20 cents a day, one trade a day. That's enough. That's enough to make a living. 10,000 shares. Certainly in a hotter market, you're talking about $2,000 a day. In a colder market, 2,000 shares, still $400 a day. You're still pushing six figures. That to me is really good. Don't overcomplicate this. You should not be trading 50, 75 times a day. Less is more. Patiently wait for the best setup and when you see it, you get in and you pay yourself.
So, you pay close attention to exit indicators. Now, as part of the resources that I'm including for you guys, I have a PDF that outlines my trading plan and it also walks you through exit indicators. As soon as I get into a trade, I want to see a stock squeezing. I want to see it moving higher. And I'm usually pretty good about my timing. So, if my timing is right, I'll get in and the stock will continue higher pretty much right from my entry point. So, if I get in and the stock is not moving higher immediately right away, that's an exit indicator in a colder market. Now, again, in a bull market when it's really hot, I can give things a little bit more time. I can be a little bit more patient. You could be a little looser, but you got to rein everything back in when it cools off. So, while we'd all love to be trading during a hot market, and we would love to be the trader who makes millions of dollars during a hot market, the fact is hot markets aren't forever. We have ups and we have downs. And what we'd probably like more than anything is to be a trader who has the conviction and the strategy and the knowledge that they can be consistently profitable in all markets. Yes, maybe the profits are higher when it's hot and a little lower when it's colder, but that you can be green when it's cold.
So, you've really got three types of traders, three scenarios for cold markets. Number one are the traders who are losing money. Now, some of those traders might be profitable when the market heats back up, but they won't make it because they give up while it's still cold. You don't want to be in that category. Number two are the traders who are break-even when the market's cold. And that's not bad all things considered because it's an improvement over the first scenario. And number two, if you break even while it's cold, when it heats back up, you'll probably start performing better. We can pretty safely assume that. And then number three, you have traders like myself who are making money even when it's cold. We may not be making a ton, not as much as in the bull market, but we're keeping our head above water. We're still making little progress. We're not going into a drawdown. When you go into a drawdown, what happens? You lose confidence. You become more emotionally compromised. You get desperate. You get frustrated. You don't want to let that happen. So reducing share size number one will minimize the extent of the drawdown if you're already starting to draw down. This is not the time to go big with big size. It's not the time. That time will come, but it's not today. Save the big share size for a few months from now or whatever it is when the market heats up. For right now, keep the share size more moderate. Keep it dialed in. All right? You just got to get through this period and get to the other side.
Now, something you can spend time doing when the market's cold is re-watching live archives from when the market was hotter. These are an invaluable resource that are available for Warrior Pro members that allow you to practice and study what the market looks like when it was really moving quickly. I think of cold markets as training for the next hot market. It's kind of like the the Olympics except uh you know instead of every four years we have them you know the cycles are much tighter but every time basically all the time in between the Olympics is training for the next Olympics training for the next Olympics for your moment to shine and so our cycles are fairly quick but even during more extended cold market cycles this is training for the next hot cycle. So, if you are ready to start trading and ready to start training for this next hot cycle, make sure you check out my resources pinned at the top of the comments and in the description down below. And if you enjoyed this episode, I hope you hit the thumbs up and I hope you are subscribed to the channel. Reminder, as always, trading is risky. My results aren't typical. So, please take it slow, manage your risk, and I will see you guys first thing tomorrow morning streaming as always at 7 a.m. for members at Warrior Trading.