Jim Cramer finally revealed the secret to how he picks a stock.
One of the easiest ways for the "Mad Money" host to identify the stocks that should be on his radar is to look at the new-high list.
These are stocks that hit a new high in trading for the day, especially on days when the market is in bad shape. If a stock hits a new high on a down day, then it obviously has something good going for it.
When a stock makes the new-high list, it is either because it is part of a bull market, it announced fantastic earnings or the sector has tremendous sales momentum.
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However, that does not mean Cramer recommends chasing after every stock on the new-high list. That would be completely ridiculous.
The list is merely meant to serve as a jumping-off point for stocks to watch. Homework is still key to ensure that a company's fundamentals are strong.
One thing to keep in mind is that there is often more continuity in the market than change. That means once a stock is purchased, things will pretty much keep going the way they were until a major shift happens.
Cramer likes to wait for a pullback before pulling the trigger to buy a stock. The key is to buy on weakness and sell into strength. He recommends waiting until a high-quality stock falls at least 5 percent, as that will give you a solid entry point.
"You only buy stocks that have pulled back from the new-high list if you are confident they will make a comeback for substantive reasons not having to do with the market," Cramer said.
The most important tip is to make sure you understand why a stock has pulled back. Make sure there is not a solid reason why everyone is selling the stock and driving the price down, otherwise the stock could turn out to be a disaster.
Cramer looks at the fundamentals to tell the difference between a troubled stock that is momentarily damaged and a troubled company headed down the tubes. As long as the fundamentals of the company remain unchanged, it is likely that it just pulled back for mechanical reasons.
"Some of my best picks have come out of this process, and hopefully some of yours can, too," Cramer said.
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