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Cramer: Approach rally with caution

CNBC.com
Friday, 2 Aug 2013 | 6:00 PM ET
Markets rallying, how can you profit?
Friday, 2 Aug 2013 | 6:00 PM ET
Knowing how to approach a rally the right way can definitely make you a better investor, says Mad Money host Jim Cramer. How to profit when the market is roaring.

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

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 a rally gives you to celebrate, it also gives you another reason to take pause.

That is, all too many investors have delighted in watching their portfolios soar during a rally only to shed tears of remorse shortly thereafter - because they didn't lock in their profits when they had they had the chance.

Those investors who had gains but then lost them learned the hard way that profits exist only on paper — until you sell.

Eightfish | Image Bank | Getty Images

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 you 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."

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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