Blue-chip stocks refer to those of well-known companies that have been in the industry for a long time. Momentum stocks, on the other hand, refers to relatively new companies that have strong growth and hype around them.
Trading momentum and blue chips tend to be different. In this article, we’ll look at how to trade these two types of companies.
Blue chips vs momentum companies
There are several important differences between momentum and blue-chip companies. First, in most cases, blue chips are usually old companies that have grown their market share over many years. For example, blue-chips like Johnson & Johnson (J&J) and Boeing were started decades ago.
On the other hand, momentum companies are usually relatively new and fast-growing. They tend to be in relatively new industries that are gaining traction. For example, a company like Nio is less than ten years old in the electric vehicle industry that is growing fast.
Second, the share price of most blue-chip companies is usually relatively high because most of them have been in the stock market for decades. For example, the stock prices of firms like Johnson & Johnson, Unilever, and Microsoft is usually above $200.
On the other hand, some momentum stocks usually have a relatively affordable stock price.
Revenue & profits
Third, most blue-chip stocks usually have stable revenue, profit, and sustainable dividends and buybacks. Most momentum stocks have relatively low - but fast-growing - revenue, little or no profits, and don’t pay dividends. Instead, they use their cash to fund growth.
In most cases, momentum stocks usually outperform blue chips. That’s because many of them are usually “sexier” than old blue chip stocks. The chart below shows the main momentum ETF has outperformed the blue chip ETF.
Top blue chip stocks
There are many blue-chip stocks in the market today. Some of the best known blue chips are:
- Johnson & Johnson
- Berkshire Hathaway
It is worth noting that many blue chips are also momentum stocks. For example, a company like Microsoft is both a blue chip and a value company because it has reinvented itself. Today, it is a leading player in cloud computing, gaming, and cloud collaboration.
Top momentum stocks
Some of the leading momentum stocks are:
Trading momentum vs blue chip stocks
Momentum and blue chip stocks are traded in a similar way. But there are several differences because of how these companies perform on a daily basis.
In general, the share prices of most blue chip stocks is usually not as volatile as that of momentum stocks. For example, the stock price of a company like Berkshire Hathaway rarely moves. That’s also true for companies like Raytheon, Johnson and Johnson, and Unilever.
› Is it possible to day trade in blue chip stocks?
On the other hand, that of many momentum stocks like CrowdStrike and Okta tend to be highly volatile. That’s because most of them are usually highly-traded by retail traders. Therefore, for day traders, we recommend that you spend a lot of your time trading momentum companies.
General rules of trading blue chips and momentum stocks
In general, there are several rules or guidance that you should use when day trading momentum and blue chip stocks. Let's see together some of them.
Use premarket movers data
Ideally, we recommend that you look at the top premarket movers every trading day. This data shows you the companies that are either rising or falling before the market opens.
After looking at this data, look at the reasons why the stocks are rising or falling. You can do this by simply doing a Google search to find the latest news.
Also, look at the volume of these stocks. Ideally, if the movement is supported by volume, there is a possibility that the price action will hold. In general, compare the current volume and the historic volume.
Use level 2 and other fundamental data
You also need to look at the level 2 and other fundamental data to look at the money flow. Level 2 refers to an order book for stocks in the market. In other words, it shows what other traders and investors are actively buying and selling.
We recommend that you use a broker, like DTTW, that provides this level 2 data. You should also consider reading the tape, which reveals the time and sales data.
Conduct technical and fundamental analysis
Next, you should always conduct technical and fundamental analysis when trading momentum and blue chip stocks. Technical analysis refers to the process of using tools like the Relative Strength Index (RSI) and moving averages to predict when to buy and when to sell.
In fundamental, you look at intrinsic issues like revenue and valuation.
Finally, day trading both momentum and blue chips is always risky. Therefore, you should always use the best risk-management strategies to reduce the loss potential. Some of the top strategies you can use are:
- Having a stop loss or a trailing stop loss.
- Properly sizing your trades.
- Paying attention to your leverage.
- Having a trading strategy on hand.
- Avoiding overnight risks.
Most day traders prefer trading momentum or relatively volatile stocks instead of blue chips. This is understandable since most blue chips are usually relatively boring stocks. However, as shown above, you can succeed trading all types of stocks.
Always remember to mitigate risks using the strategies mentioned above!
External useful resources
- 3 Tech Stocks That Could Regain Their Momentum in 2021 - The Fool