Here is a great principle to share. It’s called the Alligator Principle and Victor Sperandeo describes it in his book, ‘The methods of a Wall Street Master’. The principle is based on the way the alligator eats. The more a victim struggles, the more the alligator gets. So, if an alligator has you by the leg you put your hands down to force it off. The alligator then makes a fresh lunge and has your hands now too, as well as your leg. Ok, you get the idea. The more you struggle to get free, the worse it gets. The best option might just be to sacrifice the leg.

The principle here is good for the current markets. It is also a principle to take careful note over the last few weeks as equity markets have been very inflated. If the market shows you that you are wrong, close your position. Get out. Don’t ever be in a position where you are hoping /praying for it to turn around. Just take the loss.

How to hardwire the alligator principle

Recently there has been a post on stop placement. This can help here. Always place you stop in a place where you can know you are wrong. It is better to be out of the market wishing you were in, rather than in the market wishing you were out. So, place your stops underneath key trendlines that should hold if your view on the market is right. If they fold then just take the loss. The one thing you want to avoid at all costs is being leveraged, and wrong, and heavily underwater. That is how 20-30-40% of accounts get drained and it is unnecessary if you remember the Alligator principle.