Commandment No. 2: First Loss Is Best
Editor's note: Jim Cramer's new book, Real Money: Sane Investing in an Insane World, is available in selected bookstores now. As a special bonus to RealMoney readers, we will be running Cramer's "Ten Commandments of Trading." For more about the new book and to order it, click here. To learn his "Twenty-Five Rules of Investing," click here. To read Cramer's first commandment, click here. Today, we present Cramer's second commandment.
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) 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.
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