It's important to know how to trade not just invest, especially in choppy markets, Jim Cramer said on a rebroadcast of his "RealMoney" radio show Tuesday. In that vein, Cramer laid out his "Ten Commandments of Trading."
Cramer's 10 Commandments of Trading
1. Never turn a trade into an investment. Have a clearly defined reason for buying a stock, and declare upfront whether the position is a trade or an investment. Consider writing down exactly why you are buying the stock and when the catalyst is going to occur. Once the catalyst has occurred or fails to occur, you must sell the stock no matter what. 2. Your first loss is your best loss. Most trades need to work immediately in order for them to be right. If the trade goes against you, sell the stock quickly and move on to avoid bigger losses. Don't fight it. 3. It's OK to take a loss when you already have one. Don't pretend you aren't losing money simply because you haven't sold a losing trade. "A loss is a loss whether it's realized or unrealized," said Cramer. No one can come back from a chronic loss position, he said. That's why it's important to cut your losses sooner rather than later. 4. Never turn a trading gain into an investment loss. When you buy a stock for a trade, you should not expect to make as much money as you would on an investment. A trade that becomes an investment is akin to an "overstaying of your welcome," said Cramer. You will almost certainly give back the profit. 5. Tips are for waiters. The only reason someone gives you a tip is so he can get out, said Cramer. The person wants to get the stock moving, so he can get out at a higher price. The person is using you by giving you the tip. If that's not the case, then the person might have insider information, which is illegal to trade on.