Odd Lot Theory

Quick Summary of Odd Lot Theory

A technical analysis theory based on using odd-lot trading behavior as a contrary indicator, under the assumption that odd lots are traded primarily by small investors who are on average less experienced than institutional investors. The theory has declined in popularity as historical data has failed to support it.

Odd lot theory is a theory within the discipline of technical analysis. Unlike large institutional investors, small investors tend to trade in smaller, “odd lots.” Odd lot theory derives its name from these odd-lot investors who buy less than 100 shares.

Odd lot theory states that small independent investors are generally wrong about the timing of equity trades, and thereby serve as a contrary indicator of future stock price movements. Odd lot theory predicts that when the volume of odd-lot purchases spike, the market is due for a downturn. On the other hand, odd lot theory states that under bear market conditions, following a mass sell-off of odd lots, the market is about to recover.

While historically popular, odd lot theory has failed to be borne out by analysis of market data and has fallen out of use by most investors. Another reason for the decline of odd lot theory is the propensity for small investors to invest in mutual funds rather than shares of stock.

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