Jim Cramer’s 10 commandments of stock trading.
Posted on | January 6, 2009 |
Here are some tips for trading stocks (NOT investing!) based on Jim Cramer’s 10 Commandments of Stock Trading as covered in his book: Jim Cramer’s Real Money: Sane Investing in an Insane World.
1. Never turn a trade into an investment.
Know thy purpose. You must approach the purchase of stock with a clear goal in mind. Simply to “make a killing in the stock market” is not a goal. First declare whether you are investing or trading. Buy into investments a third at a time, to spread out your cost basis instead of trying to time the bottom. When trading, go all in and cut losses quick if the reason you bought the stock doesn’t pan out.
2. Your 1st loss is your best loss
If trading, sell when your stock declines - the trade is over. Cut your losses before you panic out at lower levels. If investing, then you should rely upon stop losses, or ride the decline out if you’re a buy-and-hold type who is in for the long haul (10 years).
3. Take a loss - when you have one.
Don’t pretend you haven’t lost money simply because you haven’t sold. If you’re holding a loser in your portfolio, sell it and harvest the tax loss.
4. Never turn a trading gain into an investment loss.
Never use the word “gain” until you have sold the stock and realized the gain. Let’s say you bought a stock just before it rises. You then figure on riding the gravy train as long as you can, and you hold on to it. The problem is, you can’t tell for sure when the wheels are going to fall off that train and you’ve held it for too long, only to ride it back down again.
5. Tips are for waiters.
If the person giving you a hot stock tip really knows something (i.e. it’s a real tip), then they would be guilty of insider trader (and so would you!) if they told you. Also, if they had a secret that worked, they probably wouldn’t share it since secrets like that usually stop working when they’re no longer secrets. It’s best to avoid the hot tip.
6. You don’t have a profit until you sell.
This is kind of the companion to #4. Gains not taken can become losses, but gains taken can never be losses. One strategy to harvest the gains while hedging against continued rise in price is to put a stop-loss order in at the level you’d like to lock your gains in at. That way, if the price continues upward, then you can adjust your stop-loss trigger upward accordingly, but if it plummets, you’ll at least realize some gain.
7. Control losses - winners take care of themselves.
1 or 2 losers can ruin your portfolio. Because of this, you need to be ruthless in cutting your losers. Rank your stocks and act accordingly (i.e. have a plan and stick to it!).
8. Don’t fear missing out.
Don’t get greedy and feel you have to get in before the market takes off without you. Be disciplined. The market is cyclical… you’ll get another chance.
9. Don’t trade headlines.
The press is almost always wrong - don’t fall for hype and misunderstanding. Of course, this often leads to the press being a terrific contra-indicator, and many times when the headlines are rosy, it’s time to sell, and vice versa.
10. Don’t trade flow.
Don’t follow the herd. Don’t buy or sell just because others are. The heard gets slaughtered. Take your time, craft a plan and have a reason for buying and selling what and when you do. This brings us full circle back to: Know thy purpose.
Conclusion.
The important distinction is that all of the above are related mostly to trading a stock over the short term and are not applicable to investing for the long term. Because of this, the above techniques are best saved for discretionary investment money and not for retirement planning.
You’ll also notice that most of the “commandments” either distill down to being disciplined, or rely upon discipline to be beneficial. I think this is true of any investment approach. If you want to be successful in the stock market, you need to have a plan and the discipline to stick with that plan. It is especially important in times like these, when the market can lose 40-50% of its value in the blink of an eye.
- A Simple Secret to Successful Investing.
- Inflation-Beating Investments for Retirement, a poorly timed article on BankRate.
- Cramer's top 5 picks for stocks to buy.
- 5 Reasons To Avoid Index Funds?
- Want to Be an Active Investor? Try a Fantasy Stock Market Game First!
- Is the Worst Behind Us in the Stock Markets?
- Choosing the Right Types of Investments
- History Of The Stock Market
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