Cramer's 'Mad Money' Recap for Aug. 5

Cramer went on to say that when stocks get more expensive, they inherently get less desirable for investors. "The risk-reward equation gets worse as the price goes up," he said.

As a result, it makes sense to trim a portfolio during a rally.

To determine which stocks to sell and which ones to keep, Cramer recommended rating each stock on a scale from one to four. One should be for stocks that investors would own at their current price.

Two should be for stocks that investors would want to own at a lower price. Three should be for stocks to be sold during a rally, and four should be reserved for stocks that should be sold at any price.

Cramer said this scale makes it easier for investors to determine which stocks should be kept and which ones should be sold. During a rally, one's become two's, two's become three's, and so on, as stocks get more expensive.

With this disciplined approach, investors should be able to lock in their gains, he said.

Raising Cash

The next rules for playing a rally are to "raise cash" and "don't buy." Returning to the common wisdom of "buy low, sell high," Cramer explained that selling into strength is the only way to stockpile cash so investors can buy stocks back at lower prices later.

He said rallies are the perfect time for investors to stop trading on margin if they have margin accounts in their portfolios. He highly recommended using rallies to strengthen portfolios, not weaken them.