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3 rules for trading like Cramer

(Click for video linked to a searchable transcript of this Mad Money segment!)

Trading versus investing. Those terms are kicked around on Wall Street all the time and if you're new to the market you may think they're interchangeable.

They're not.

Typically trading means moving in and out of positions over a short period of time, sometimes in the same day. An example would be betting on a stock's move immediately after earnings are reported. That's a trade.

Investing involves longer time horizons, as much as a year or more, and it typically involves themes that have breadth such as the renaissance in housing or the resurgence of banks.

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On CNBC's "Mad Money" host Jim Cramer doesn't typically advocate that 'home gamers' trade. That's the deep end of the pool and something he thinks is better left for the pros.

"I have deliberately skewed the last 500 some odd shows away from trading and toward investing because there are so many more obstacles to trading than investing these days," he said. "You have to watch your positions like a hawk, to the point where it's very hard to do your full-time job and also follow the market."

However, if you're among those Cramer fans who loves the thrill of trading – that is moving in and out of positions with relative aplomb – Cramer does have some advice. It follows:

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1. Make sure you have a catalyst

"I would do no trade if I couldn't explain exactly what the company did and why I liked it and what I expected to happen," he said.

2. Develop an exit point

"Do no buying of anything unless you have an exit strategy in place from the moment you put the trade on," said Cramer. And that doesn't just mean a level at which to stop out if the trade goes against you. It also means knowing at what level you'll ring the register if you have profits.

3. Trade with conviction

"If you have little confidence, you can easily be shaken out by the broader market," Cramer said. Sometimes stocks decline before they advance. You need to believe in your thesis each and every day.

"If you can do all of those things and you have an interest in trading rather than investing, Cramer said give it a try – but start small."

Call Cramer: 1-800-743-CNBC
Questions for Cramer? madmoney@cnbc.com
Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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