Odd Lot Theory

The odd lot theory uses the sale of odd lots – small blocks of stocks held by individual investors – as an indicator of when to buy into a stock. Investors following the odd lot theory buy in when small investors sell out. The main assumption is those small investors are usually wrong.

The odd lot theory is a contrarian strategy based off a very simple form of technical analysis – measuring odd lot sales. How successful an investor or trader following the theory depends heavily on whether he checks the fundamentals of companies that the theory points toward or simply buys blindly.

Small investors aren't going to be right or wrong all the time, and so it's important to distinguish odd lot sales that are occurring from a low-risk tolerance from odd lot sales that are due to bigger problems. Individual investors are more mobile than the big funds and thus can react to severe news faster, so odd lot sales can actually be a precursor to a wider sell-off in a failing stock instead of just a mistake on the part of small-time investors.