"We are not in a regular market," Jim Cramer told
"RealMoney" radio show listeners Friday. "This is a market that goes up for periods and down for periods ... and this needs new rules." So, Cramer gave listeners his "10 Commandments of Trading" that he used to navigate the choppy waters of the 1990s stock markets. Trading is different from investing, he said. Trading means you're going to take some off the table. It's buying and selling. Investing means you're in a stock for a longer period of time. And you have to decide the day you buy whether it's for a trade or an investment, Cramer said. A trade is a stock that you buy because you believe that some catalyst will push the stock higher, allowing you to sell and lock in a gain. This lead Cramer to his first commandment. Commandment No. 1: Never turn a trade into an investment. If you're buying for a trade, and your specific catalyst doesn't occur, or if it happens and the stock doesn't budge in a few days -- get out, he said. Don't decide to hold onto the stock for an investment. Nothing about the company has changed, so you shouldn't change your mind and hold onto the stock. Commandment No. 2: Your first loss is your best loss. Cramer said that if your trade goes down, you have a problem, and you want to get out soon when the decline still amounts to a short period of time or a small dollar amount. Cut your losses quickly and get over them quickly, he said, because the losses to come will be at lower levels and at a bigger cost. "People can feel when a trade is going awry, but because of ego, because of pigheadedness, they don't want to hear the thunder," he said. Then they must panic out at lower levels.
Commandment No. 3: It's OK to take a loss when you already have one. Cramer said that a lot of people pretend that they're not losing money because while it's still on paper they haven't realized the loss. "People act as if they're not down because they haven't taken their money off the table. They rationalize that they're in the money until they sell regardless of whether they're profitable or not." A loss is a loss whether it's realized or unrealized, he said. It's better just to acknowledge the loss and take it, to realize it before it does a lot of damage because no one can come back from a chronic loss position. Commandment No. 4: Never turn a trading gain into an investment loss. Consider a trader who bought Altria ( MO) before the quarter and then watched it go up 4 points after they reported. Cramer said that it's tempting to wonder whether it's a good idea to hold onto the stock, rather than sell and take the money. You can't talk about a rising stock price like it's a gain until you sell it and take the gain, he said. If nothing is booked, then nothing is gained. He said that he once broke this commandment and that he turned a six-figure gain into a multimillion dollar loss. "A trade is just a trade. If you turn it into an investment, you are overstaying your welcome." Commandment No. 5: Tips are for waiters. Do your homework, he said. Don't trade on hearsay.
Commandment No. 6: You don't have a profit until you sell. Cramer said that a lot of people sit on their paper gains and then lose them because they don't want to pay the taxes they'll be hit with when they sell. But the amount you have to pay in taxes is nothing compared to the amount you could lose if you don't lock in the gain on your trade. Commandment No. 7: Control your losses because the winners take care of themselves. Cramer said that traders need to spend the bulk of their time keeping tabs on potential problem stocks because one bad apple can ruin a portfolio. "Don't say, 'I'll just wait for this one to come back and then not do it again. I'll wait for EMC ( EMC) to come back to $18 and then I'll be done with it,'" Cramer said. This is how people who lose money think, he said. Commandment No. 8: Don't be afraid that you're missing out. Cramer said that if this is your worry, then you're probably coming in too late. It's better to acknowledge that you've missed out on the opportunity and to move on to the next opportunity. Commandment No. 9: Don't trade on the headlines. The press is almost wrong in the quick takeaways because they're under pressure to get the story out, he said. Commandment No. 10: Don't trade on flow. "You're watching CNBC and you see multiple takes, multiple trades to the upside, and you think, 'Hey must know something.' You think that you've got to get involved," Cramer said. If this is the only reason that you're buying, then you're trading on flow, and you're likely to lose a lot more money than you'll make.