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Cramer's 'Mad Money' Recap: Mad Money's Rally Playbook

Cramer outlines what you can do to capitalize on a big market rally.

Click here for an archive of Cramer's "Mad Money" recaps.

"Making lots of money on a great day is fabulous," Jim Cramer told viewers of his "Mad Money" TV show on Friday, "but rallies are times for action."

Cramer said too many investors don't trade during rallies and thus watch their gains disappear.

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Taking a page from his rally playbook, Cramer told investors they can save themselves a lot of grief by checking "their emotions at the door."

He said investors shouldn't let their emotions prevent them from doing what is needed during big rallies. He said investors often let emotions sway them to hold on to their stocks -- the exact opposite of what they should be doing.

"The goal is to buy low and sell high," he reminded viewers, "so when the market's up big, it's time to lock in some profits."

Cramer also reminded viewers that gains in the market are not really gains until the stocks are sold. He said the way to play big market rallies is to sell in increments during the rally. "Get the great prices while they last," he said.

A Strategy for Selling

Cramer's first rule for playing a rally is to "be really tough on your portfolio." He said investors should not get swept up in the market euphoria, but rather scrutinize each and every stock in their portfolios to determine if it has earned the right to stay there at its new higher price. "Assume that everything is guilty until proven innocent," he said.

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.

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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.

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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.

Cramer also said investors should refrain from buying stocks the day after a big rally. He said that "rallies make us overly bullish" and that's dangerous. "Just tell yourself that you missed the opportunity and move on," he said.

According to Cramer, the market will invariably retreat after big moves and only then is it a good time to buy.

What to Drop

Cramer mentioned two types of stocks that he says must be sold into a rally. The first are stocks that have already had great runs. These stocks, Cramer said, may have been attractive at lower prices, but become increasingly less attractive at higher prices.

He reminded viewers that big momentum names also need to be periodically trimmed to remain diversified. He said that no stock should account for more than 20% of a portfolio and even the successful stocks need to be sold.

The second class of stocks that should be sold into a rally are the losers. He said stocks that don't perform well during a market rally often have underlying issues. "Stocks that don't go up aren't ones you want," he said.

A Risky Portfolio

Cramer warned that making too much money during a rally is also a problem. He cautioned that if investors' portfolios are posting huge gains, it probably means that they're taking on too much risk.

Rallies, he said, are the perfect diagnostic tool to assess just how speculative or how risky a portfolio actually is. He suggested that investors use big rallies to examine their portfolios and make adjustments.

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Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for, Inc., and CNBC, and a director and co-founder of All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of or its affiliates, or CNBC, NBC UNIVERSAL or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or is related to the specific opinions expressed by him on "Mad Money."

None of the information contained in "Mad Money" constitutes a recommendation by Mr. Cramer, or CNBC that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You must make your own independent decisions regarding any security, portfolio of securities, transaction, or investment strategy mentioned on the program. Mr. Cramer's past results are not necessarily indicative of future performance. Neither Mr. Cramer, nor, nor CNBC guarantees any specific outcome or profit, and you should be aware of the real risk of loss in following any strategy or investments discussed on the program. The strategy or investments discussed may fluctuate in price or value and you may get back less than you invested. Before acting on any information contained in the program, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.

Some of the stocks mentioned by Mr. Cramer on "Mad Money" are held in Mr. Cramer's Action Alerts PLUS Portfolio. When that is the case, appropriate disclosure is made on the program and in the "Mad Money" recap available on The Action Alerts PLUS Portfolio contains all of Mr. Cramer's personal investments in publicly-traded equity securities only, and does not include any mutual fund holdings or other institutionally managed assets, private equity investments, or his holdings in, Inc. Since March 2005, the Action Alerts PLUS Portfolio has been held by a Trust, the realized profits from which have been pledged to charity. Mr. Cramer retains full investment discretion with respect to all securities contained in the Trust. Mr. Cramer is subject to certain trading restrictions, and must hold all securities in the Action Alerts PLUS Portfolio for at least one month, and is not permitted to buy or sell any security he has spoken about on television or on his radio program for five days following the broadcast.