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Cramer: Big lessons from this week's flash crash

Cramer: Big lessons from this week's flash crash

Some may think that since the market has settled down nothing really happened this week. Jim Cramer disagreed, calling it one of the most monumental weeks in years. It was a week that displayed unprecedented volatility and the eye-popping frailty of equities.

"We traveled about 10,000 Dow points up and down for the week in total—a roller coaster that simply isn't healthy no matter if it ended pretty much where it began," the "Mad Money" host said.

More importantly, Cramer was reminded of some valuable personal finance lessons. This was a necessary education for investors to know how to protect themselves and take advantage of opportunity when it presented itself.

Cramer ticked down the lessons he learned on each day of the week:

Monday: Even investing veteran Cramer was shocked at what he saw on Monday. He certainly expected weakness at the opening bell, given the weakness in China. But the action that occurred wasn't just selling; it was a flash crash with the Dow opening down 1,089 points.

The massive drop was unnerving to Cramer, but he was reminded of two things.

Lesson No. 1: Never use market orders
Prices on Monday were absolutely horrendous, but then they snapped back close to where they went out on Friday. Both a sell order with a limit and a buy order with a limit put a couple of points above those terrible prices could have let you crush the market. Terrific bargain buys could have been made.

Lesson No. 2: Get a back-up brokerage account
These days, Cramer wants investors to accept the fact that the mechanisms that control stocks just can't handle heightened activity without cracking. It's going to happen, and you need to be prepared. The market gave up the ghost on Monday with a wave of sell orders, and it overwhelmed the systems of five different brokerage firms. The wave was so strong that these firms had to suspend their online business.

Tuesday: Despite the hammering on Monday, the Dow roared at the opening bell on Tuesday. It bolted 350 points and continued to go higher.

Lesson No. 3 No one ever made a dime panicking
If investors had sat tight through the ugliness of Monday, they would have had a fabulous exit point on Tuesday. Acting on emotions is often the wrong thing to do.

Lesson No. 4 If the market doesn't stay up after 2 p.m., ET, there will be aggressive selling
Unfortunately, the rally on Tuesday did not last. Why? Because of margin calls. Many investors borrow money using margin accounts, and when there is a decline in collateral for an account the brokers will demand the investor to wire cash to cover the collateral.

Cramer has worked in a margin clerk's office, and he knew that if clients don't wire money by 1 p.m, ET, the broker will begin to sell their positions. The selling usually finishes around 2 p.m., ET. So if the market doesn't stay up past 2 p.m., ET, when the last of the margin orders are executed, you can expect aggressive selling to return. That is exactly why selling accelerated at 3 p.m., ET, on Tuesday.

Wednesday: Cramer assumed the market would be even worse this day because the Chinese index lost about 1 percent overnight. But he was wrong, as the Dow rallied 350 points at the open. The market rallied on the commentary of Bill Dudley, president of Federal Reserve Bank of New York.

Dudley confirmed a pragmatic view of whether the Fed would raise interest rates in September. He confirmed that it would allow data to determine the possible change, which assured investors that the Fed would take into consideration the world turmoil in deciding to raise interest rates.

Lesson No. 4 Be ready for a Fed increase
If the stock global stock market were to calm down, be ready for an interest rate hike. On Thursday, the strength of the U.S. economy was confirmed by the strong GDP number of 3.7 percent.

Lesson No. 5 There's always money on the sidelines
Regardless of what the Fed does, Cramer wants investors to remember that there is always plenty of money on the sidelines waiting for bargains. After the massive decline that the market saw, there were tons of bargains to be found.

Thursday: Cramer saw a stunning change of landscape where the drop in stock prices suddenly created yield that was twice what a U.S. Treasury has.

Lesson No. 6 Stocks get cheaper when they go down; use the volatility to buy
The volatility will give investors a chance to buy high-quality companies at bargain prices.

Ultimately, Wednesday's rally produced an all-clear signal, and it brought out the buyers worldwide. Even China rallied going into Thursday's session. There was a remarkable 10 percent run in oil, making it the biggest one-day gain in crude in six years.

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Lesson No. 7 Stress from bad bets on gigantic firms can produce massive losses
Cramer wants investors to always be on the lookout for what he calls a "credit event." This refers to a company going bust because it bet the wrong way. Typically, you won't know who's going bust until it's too late, and Cramer has feared that there was a credit event lurking in commodities.

The big gain in oil calmed those fears. So, when the stress was relieved, the market rallied from something that made no sense in the real world, like higher gasoline.

Friday: The market slowly meandered around, closing up a long week and bringing the Dow close to where it began on this journey on Monday

"The turmoil seems to be behind us, and if you remember this week's lessons you will be in a much better position if the market goes crazy again," Cramer said.

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