Cramer: Approach Rally with Caution
The euphoria of a rally is hard to resist. Cramer knows those gains are the whole reason you started investing in the first place.
But for every reason the market gives you to celebrate in a rally it gives you another reason to take pause.
All too many investors have delighted in watching their portfolios soar in value during a rally only to weep tears of remorse shortly thereafter - because they didn't lock in their profits when they had they had the chance.
They learned the hard way that profits exist only on paper — until you sell.
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Therefore, if you're going to be successful in the market, you have to learn to leverage a rally, Jim Cramer explained on CNBC's "Mad Money."
In other words, sell into strength. Don't get swept up in speculation about how high the market can go. Instead, at the time you establish your position, determine a good exit point that works for you and if a rally drives a stock to that level, pull the rip cord.
Perhaps it's a gain of 5% - perhaps it's 50% - but pinpoint a level at which you exit and then -- exit.
Now, just to be clear, Cramer doesn't mean sell everything.
One of the top rules on "Mad Money" is that investors should always buy and sell in increments. That way you're leveraging market fluctuations.
You wouldn't want to unload your entire position of a stock at one price only to watch it trend higher. So instead, you sell a portion of your holdings at whatever price level decide. But if a rally drives your stock to a sell level, Cramer said, don't be greedy; ring the register.
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What's the bottom line?
The way in which pros such as Jim Cramer trade rallies can feel somewhat counter-intuitive.
If you're new to the market, a rally probably make you want to put even more money in stocks. That is, a rally probably fills you with enthusiasm about the future.
But Cramer recommends just the opposite, use the upswing to take profits. And then position for what you think will come next. "I always approach a rally with caution," Cramer said, "not with unbridled enthusiasm."
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Questions for Cramer? madmoney@cnbc.com
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