Cramer said his normal investment strategy would dictate that, if an investor wants to purchase 300 shares of a company, he or she would buy them in increments of 100 shares over a period of weeks or months, using broad-based selloffs as cues for the purchases.
However, a trading strategy is a little different, said Cramer. Trading around a core position dictates that, if an investor owns 300 shares, he or she would sell 50 of them anytime the stock moves higher by 3%. Then as shares retreat by 3%, an investor can buy them back on the cheap.
Cramer said that trading in smaller increments may not seem like much, but over time, the profits can add up quickly. In today's markets, where stocks can soar one day and be thrown out with the bath water the next, it likely won't take long before home gamers begin to see their trading strategies pay off.
Know When to Sell
Cramer's last trick for investors involved the critical question of when to sell a hot stock. He said there's certainly a lot of money to be made by owning a hot momentum stock, but investors have to know when it's time to leave the table or risk losing it all.Such was the case with high-fliers Netflix (NFLX) and Salesforce.com (CRM), two long-time Cramer faves that fell from grace in spectacular fashion. So how can investors tell when a momentum stock has peaked? Cramer said one thing they can look for is the analysts' coverage. For smaller, more speculative stocks, Cramer said the rule of thumb is that when a stock has half-a-dozen or so analysts covering it, the stock will begin to peter out because it has become too well known. This was the case with Hansen Natural (HANS), one of the hottest stocks between 2004 and the first half of 2006, noted Cramer. The whole run higher, skeptics were warning that the energy drink makers' momentum would fade, but with analysts still initiating coverage and touting the stock, it continued its run higher.
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