Cramer's 'Mad Money' Recap for Aug. 6

The bottom line on Cramer's third method is that insider buying, coupled with a heavy short position, also equals a buy, Cramer said. "This is an explosive combination, and more often than not, it means there's going to be a short squeeze," meaning that the shorts will start buying to cover themselves.

Smart Shorts

"Shorts are smart. In fact, a lot of the time they tend to be smarter than regular long-side investors, but they don't know more about a business than the insiders who run it," he went on to say.

"If a lot of people are shorting a stock and management is buying it, usually -- do your homework -- you're going to want to side with management, and then you can ride a short squeeze higher and higher."

The fourth method to his madness, Cramer said, is trading around a core position. Going through the process step by step, he said the first thing people need to do is find a stock. "Find a stock that you believe will be going higher over the long term," Cramer said.

"What you're really looking for here is a great company that could get tossed around by market volatility but will go higher if you're patient."

If people were just investing, then they'd set up a position in the stock, buying in increments, he said. But if they wanted to trade, say, a 300-share core position of a $100-a-share stock, then every time the stock jumped three points, or 3%, they would sell 50 shares, Cramer said.