Editor's note: Jim Cramer's book, Real Money: Sane Investing in an Insane World, includes Cramer's "Ten Commandments of Trading", which we've reprinted below. For more about the new book and to order it, click here. To learn his "Twenty-Five Rules of Investing", click here.
First Loss Is Best
Commandment 2
Good trading, no matter what it's based on, technicals, fundamentals, the stars, the news, requires a level of discipline that goes against human nature. We are taught in life to be patient, to let things work out, not to be hasty, yet none of that works when it comes to trading. You have to be willing to cut and run, to use that "flight," not fight, instinct that we supposedly are born with but suppress wholeheartedly when we are grown up.
That's what the second commandment of trading is about, and that's why it is the second commandment of trading:
Your first loss is your best loss.
I genuinely believe that most trades need to work almost immediately for them to be right. I am willing to put a trade on and take it off immediately even if it doesn't feel right. There's a simple reason why that is so. When I trade, I try to trade for points, or for at least a point. Less than that is too hard.
But if I am willing to have a trade go more than a half of a point against me, then it will be almost monumental to get back to even. So I like to stop myself out quickly.
(Notice how different this all is from investing, where I expect the stock to go "against" me and welcome it so I can improve my basis.)
So, let's say that I bought Starbucks (SBUX - news) Wednesday because I figured the comp numbers would have improved. You have to believe that wherever that stock trades after that number comes out and you have digested it, you are at risk to having a very big loss.
So, you take that first loss. And you move on.
Rather than fight it.
That's how you have to think, every day, about every trade.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. Watch Cramer on Mad Money at 6 p.m. & 11p.m. ET weeknights on CNBC. Click here to order any of Jim Cramer’s books including his latest endeavor Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column by clicking here.
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