Mad Money

Cramer's technique for home-gamers to combat stock market volatility

Key Points
  • "Mad Money" host Jim Cramer goes over the concept of trading around a core position.
  • While trading seems exciting, Cramer says that if investors are good at it, it is usually boring.
  • The idea is to profit from short-term peaks and troughs in a stock's price, the "Mad Money" host explains.
Evrim Aydin | Anadolu Agency | Getty Images

Learning how to trade around a core position in a portfolio can be an investor's best technique to buck market volatility. In fact, it was one of the techniques Jim Cramer used to become successful on Wall Street.

"This is a discipline that is incredibly useful, especially in volatile, crazy markets," the "Mad Money" host said.

Trading is all about profiting from short term fluctuations in price, which can be caused by an unexpected catalyst or a wild market. In Cramer's opinion, knowing proper trading strategy, including how to trade around a core position, will make you a better investor.

Cramer outlined the steps to trading a core position below.

First, pick a stock that you like and believe will go higher in the long term. Think of a company with solid fundamentals that can stay strong when the market becomes volatile and will go higher with a little patience.

Cramer recommended establishing a position in the stock by buying shares in increments. Buying it all at once is just plain arrogant, he said.

For instance, if you want to own 100 shares of your favorite stock over time, buy the stock in increments of 25. Buy it four times over a span of weeks or months until you reach 100 shares.

For those who want to live a little and trade, Cramer says home-gamers can make money, too, if they trade correctly.

To begin trading on a core position, every time the stock jumps 5 percent, sell 25 shares. Keep shaving a little off the top to bring in some profits, a strategy called scaling out of a stock. If Cramer loves a stock, however, he likes saving the last 25 shares.

The next step is to wait until something happens to the stock that knocks it down to the same price where you first bought it, as long as the news isn't specific to the stock. When the stock comes down, you start to buy it in increments again.

This might appear to be small potatoes, but over time, the profits add up. Up 5 percent and sell 25 shares, then buy it from where you started. The cash in your pocket will start to accumulate.

"A lot of people think that trading is incredibly exciting, and it can be, but if you're good at trading around a core position, you should be pretty bored. All you're doing is watching the stock move, and trimming or adding to your position accordingly," Cramer said.

The purpose of this technique is to avoid putting yourself in a position where you have too much money on the table for a stock. That way, if the stock takes a hit and goes down or if you have too little on the table to take advantage of upside, you are prepared.

"Trading around a core position is an important basic trading strategy that everyone can use, even those of you who find the notion of trading, as opposed to investing, to be abhorrent," Cramer said.

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