Jim Cramer’s guide to investing: How to trade around a core position

CNBC’s Jim Cramer said he knows he usually tells investors to own stocks for the long haul, not trade for gains in the short-term. But trading around a core position is a basic and useful discipline, he said.

When trading around a core position, investors maintain a long-term investment – the core position – but buy and sell small bits of the investment as the price fluctuates. But Cramer noted it’s imperative that investors keep their core position only if their thesis for owning the stock continues to hold up.

“The basic idea is to avoid putting yourself in a spot where you have too much on the table in case the stock gets swatted down, or too little on the table to take advantage of any upside that comes your way,” Cramer said. “Trading around a core position’s an important basic strategy that everyone can use, even those of you who find the notion of trading totally abhorrent, because it’s less trading and more a supplement to investing.”

For example, an investor could own 100 shares of a stock that they believes has long-term potential. As the stock starts to climb, investors could sell a quarter of their position during each increase as long as they hang on to the original 25 shares.

But when the stock starts to come down, investors can then use that weakness to buy more shares in increments. They can even buy beyond the 100 original shares if the stock goes low enough. Although these gains may seem like “small potatoes,” Cramer said, they can add up over time as investors repeat the process.

“All you’re doing is watching the stock move, and then trimming or adding to your position accordingly,” he said. “Contra the image of trading as something that’s reckless and irresponsible, trading around a core position is really the height of prudent portfolio adjustment.”