The Best Way to Trade Stocks

Cramer catches a lot of flack for allegedly promoting quick stock “trading” on Mad Money, which many say is reckless and irresponsible, even though the show is largely about investing for the long term. He looks for stocks that will work for 18 months or more, rather than those that might turn a fast profit.

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But that doesn’t mean you shouldn’t know how to trade. In fact, it pays to put trading disciplines into practice, Cramer said Monday, so you can buy more shares of good stocks at lower prices while selling others when they’re nearing their highs. Put simply, knowing how to trade makes you a better investor, and “trading around a core position,” in particular, is one of the most basic and useful disciplines out there.

So how is it done? Let’s say you own 300 shares of Amazon.com – or Apple , JPMorgan Chase , Ford Motor or Home Depot for that matter – at $100 a share. Every time the stock jumps three points, or 3%, you sell fifty shares to collect some profits. By the time AMZN reaches $109, you own 150 shares. Then you wait for something, as long as it’s not a change in the company’s fundamentals, to knock the share price down. And these days there are plenty of things that could do that, not the least of which is unwarranted investor panic. As the stock declines, you buy it back in increments, say, 50 shares at $103, 50 more at $100 and so on.

There are a few other rules to keep in mind as well: You never want to be in a position where you’re holding too much of the stock in case it drops in price, or too little in case it takes off. So again using Amazon as an example, Cramer said his limit for the position would be 300 shares on the high end and 100 on the low end. Of course, the scale depends on your holdings at a given moment, but you want to be able to move with the market.

This may seem like it wouldn’t generate much in the way of profits, Cramer said, but they do add up over time. And that’s what trading a core position is all about. While some consider trading to be a type of get-rich-quick excitement, if you’re good at this strategy you should be pretty bored. You’re just watching the stock move and trimming and adding to your position accordingly.

For this reason, trading around a core position is the opposite of reckless and irresponsible. In fact, Cramer said, it’s “the height of prudent portfolio adjustment.”

As of this posting, Cramer’s charitable trust owned Apple, JPMorgan Chase and Home Depot.

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