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Grade Your Trade Like Jim Cramer

If you think stock market rallies are a good time to sit back and count your profits, Cramer said you're sadly mistaken.

The Mad Money host worries that during a big rally too many investors, especially investors who are relatively new to the market, become swept up in the euphoria of the advance.

Gains often trigger cocktail party chatter about how high the market can trade. As a result, new investors become enamored with the dream of absolutely massive profits.


But in today's market, big gains rarely come from buying and then holding a stock to infinity.

Instead Cramer said as everyone else gets distracted by a market advance, rallies are a good time for you to exercise discipline and parse through your portfolio.

There are many ways to reassess your holdings but Cramer has a little trick – he grades stocks on a scale of 1 to 4.

Here's how his numbering system works:

#1 – A stock Cramer would buy at its current price.
#2 – A stock Cramer would buy if it pulled back.
#3 – A stocks Cramer would sell at a higher price.
#4 – A stocks Cramer would want to sell period.

Amid the rally, a stock that was once a #1 may become a #2. Also a stock that was a #3 often becomes a #4.

Therefore, in a big rally, Cramer will sometimes sell #2 stocks, assuming he'll get the chance to buy them back at a lower price in the future. Also he'll sell #4 stocks, simply because the market propelled the stock to a level at which he thinks it's time to exit.

Now, that's not to say this strategy is fail proof – it's not. "But it is an effective way to mostly buy lower and sell higher," Cramer said.

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Read More from Cramer:
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