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The Smart Way to Trade Rallies

The euphoria of a rally is hard to resist. After all, those gains are the whole reason you started investing in the first place. But you’ll pass up some serious money if you don’t know how to trade these moves.

Plenty of investors probably have watched their portfolios soar in value with the averages, only to watch them slip right back down again – because they didn’t lock in their profits when they had them. They had to learn the hard way that those profits exist only on paper – until you sell.

So you have to know how to take advantage of a rally if you’re going to be a successful investor. Cramer on Wednesday was focused on short-term rallies, in particular, and he emphasized one important thing for people to keep in mind: that stocks will eventually pull back. So a big day in the markets is your chance to capture those great prices.

Cramer likes to ask himself two questions in these situations: 1. What do I need to protect myself should the market decline? And 2. What can I do for my portfolio on the day of the rally that I couldn’t do the day before? The answers to both these questions involve selling, he said, and he urged viewers to use these rallies to do just that.

Now, this doesn’t mean that you sell everything. One of the top rules on Mad Money is that investors should always buy and sell in increments. That way they’re better positioned to cope with market fluctuations. You wouldn’t want to unload your entire position of, say, Caterpillar , Google , Walmart , JPMorgan Chase or Freeport-McMoRan at one price only to watch the stock trend higher. So instead, you sell a piece of your holdings every time the share price ticks up at whatever increment you decide. But in a rally, you want to sell in even bigger increments in order to capitalize on the moment.

All of this may sound contrary to logic. Rallies make investors want to jump into the market, not out of it. But Cramer recommended that viewers maintain a certain amount of skepticism at all times because they just never know what will happen. (Financial crisis of 2008, anyone?) So rallies are, in fact, a chance to prepare yourself for what will come next.

“And that’s why you have to approach a rally with caution,” Cramer said, “not with unbridled enthusiasm.”

When this story published, Cramer's charitable trust owned JPMorgan Chase.

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