This METAmorphosis Made Jim Cramer Cry - Why Fundamental Trading Doesn't Work

Fundamental trading strategies have been around for a long time. In fact, fundamental trading is known as the source of many old-line trading successes... ala the Peter Lynches of the world. But fundamental strategies don't always work. In fact, the fundamental approach often fails. Here are 3 reasons why fundamental trading frequently ends badly.

Reason #1 It takes incredible patience to stick to a fundamental trading strategy. For example, you might have to wait for weeks or even months for a trade to materialize. This can be difficult for traders who are used to [and, often desire] making quick decisions and seeing immediate results. The failure here is that traders often "jump in too early" and fail to allow the circumstances to perfect. Further, after parameters line up, and you enter a trade, it takes just as much patience [if not more] to hold your position for the long period of time often required for your trade to play out.

To be clear, patience [or the lack thereof] is often a problem for Price Behavior Traders as well. But there is an important difference that makes the outcomes for the different approaches very different.

That difference?

Stop Losses... Price Behavior traders use them... Fundamental traders don't. When a trade doesn't work for a fundamental trader [i.e., it goes down instead of moving higher], Price Behavior traders accept the small loss and move on. Fundamental traders buy more. It's how fundamental logic works. Sometimes it works spectacularly well. Other times it destroys your account.

Reason #2 Another reason why fundamental trading can fail is because it's often quite complex. There are many different factors to consider when making a trade based on fundamental information. As a result, it's easy to make a mistake. This is especially true for novice traders who don't have a lot of experience.

For example, fundamental traders might wait for price to fall to a level where the price/earnings multiple is below 18, but only while earnings grow at the right rate, sales to book are above a certain level and the c suite executives are all pristine... and remain as much.

I'm sure you see the problem there.

Reason #3 - Finally, the biggest reason fundamental trading fails is because it's based on the need for accurate information. For instance, a trader might believe that a stock is undervalued because of certain economic indicators or because he believes the information a company puts out about their own prospects. However, this information can be misleading and lead to losses... especially when combined with the unwillingness to use stop losses mentioned above,

Fundamental trading can be profitable. It can also be difficult and risky. Most importantly, it's hard for fundamental trading compound as quickly as short-term Price Behavior trading no matter how well it's done. If you're north of the 50 yard mark in years [and you'd like to retire before your 8th decade], you should be especially cognizant of this dichotomy.

Let's have a look at this phenomenon through the eyes of a well-known charlatan... I meant commentator with respect to Meta [#META] also known as the stock formerly known as Facebook [#FB].

First... Cramer cries on national television.

And who can forget this little ditty?

At any rate, we know Cramer is... well... Cramer.

Here's a look at the charts in 3 different time frames.

Meta Monthly Chart

Meta Weekly Chart

Meta Daily Chart

Simple Price Behavior Traders would have been long out of META, so this wouldn't be an issue.

What's my point? Pretty simple actually.

Fundamental trading can work... But it takes a lot longer than short-term Price Behavior trading and doesn't compound nearly as well.