Fifty Percent Principle

The fifty percent principle predicts that an observed trend undergoes a price correction of one-half to two-thirds of the change in price. A stock that exhibits an upward trend and gains 20-percent experiences a 10-percents price fall before continuing its rise. In most cases, this rule applies more easily to short-term trends. Since many skittish investors take profits early to avoid getting caught in a reversal later, the price correction represents a natural part of the trend. If the correction exceeds 50-percent of the change in price, this represents a failure in the trend and a premature reversal.

Greater Fool Theory

The greater fool theory suggests that an investor gains profits as long as a greater fool exists to buy the investment at a higher price. As long as someone else pays more to buy a stock from you, an overpriced stock still makes money. Eventually the investor runs out of fools as the market for any investment overheats. Investing on the basis of the greater fool theory means ignoring valuations and earning reports. Since ignoring data presents as much risk as paying too much attention to it, investors ascribing to the greater fool theory sometimes hold the short end of the stick after a market correction.

Odd Lot Theory

This theory utilizes the sale of odd lots, or small blocks of stocks held by individual investors, as a stock indicator of when to buy. When small investors sell out, odd lot theory followers buy in. This contrarian strategy focuses on the very simple technical analysis of odd lot sales. A trader’s success depends on whether he checks the fundamentals of companies that the theory points out or simply buys blindly. Since small investors make the right decision in some cases, investors must avoid distinguish between odd lot sales occurring from a low-risk tolerance and odd lot sales resulting from larger issues. Some odd lot sales imply a wider sell-off in the future of a failing stock while others represent a true mistake of small investors.

Short Interest Theory

Short interest theory suggests that a high short interest rate represents a precursor to a rise in stock price. The basis for the theory reasons that all the stock traders and professionals make the right decision when combined. Although stock price sometimes rises by virtue of being heavily shorted, this reasoning works in most cases. Short sellers eventually cover their positions by buying their shorted stock. This creates buying pressure that pushes the share price upward.