Strategy Thesis
Donchian-breakout is a rules-based trend-follower drawn from one of the oldest systematic frameworks in equities trading. The logic is deliberately simple: enter a long position when a stock closes at a new 20-day high, and exit when it falls to a 20-day low. No forecasting, no fundamentals — pure price-channel momentum.
The strategy runs across a 24-stock universe of U.S. large-caps spanning technology (AAPL, MSFT, NVDA, GOOGL), financials (JPM, BAC, V, MA), healthcare (JNJ, UNH, PFE, ABBV), consumer staples and discretionary (PG, KO, WMT, COST, MCD, NKE, HD), energy (XOM, CVX), industrials (CAT, HON), and media (DIS). The breadth reduces single-sector concentration risk, though all names are USD large-caps, leaving macro and dollar exposure largely undiversified.
Backtest Performance
Over the 451-day backtest window, the strategy returned +6.95% (CAGR 3.83%) on a $10,000 simulated account, reaching a final equity of $10,695. The headline number is unimpressive against a period that included strong equity rallies in parts of this universe.
The risk profile is the sharper concern:
| Metric | Value |
|---|---|
| Sharpe ratio | 0.34 |
| Max drawdown | 21.73% |
| Win rate | 38.46% |
| Trades | 108 |
| Turnover | 2,083% |
A Sharpe of 0.34 and a max drawdown of 21.73% on a strategy that wins fewer than 4 in 10 trades is a demanding combination. Trend-following strategies structurally accept low win rates — the thesis is that winners run long and losers are cut quickly — but this model hasn't yet demonstrated that the average winner outpaces the average loser by a sufficient margin to compensate for the drawdown risk.
Walk-Forward Validation
The four-fold walk-forward analysis tells a more interesting story than the aggregate numbers suggest:
| Fold | Period | Return | Sharpe | Max DD |
|---|---|---|---|---|
| 1 | Aug 2024 – Jan 2025 | +0.73% | 0.21 | 6.71% |
| 2 | Jan 2025 – Jul 2025 | -7.46% | -1.07 | 15.58% |
| 3 | Jul 2025 – Dec 2025 | +14.09% | 2.72 | 3.14% |
| 4 (OOS) | Dec 2025 – May 2026 | +11.35% | 1.86 | 6.01% |
Three of four folds are positive, and the final out-of-sample fold — the one that matters most for live deployment — delivered +11.35% with a Sharpe of 1.86. That is a materially better picture than the full-period aggregate implies, and it is why the strategy was approved for live trading.
However, the formal validation gate was not passed. The Probabilistic Sharpe Ratio (PSR) of 0.674 and a Deflated Sharpe Ratio (DSR) of only 0.198 across 6 trials indicate that the observed Sharpe cannot yet be distinguished from noise with statistical confidence. The fold-2 loss of 7.46% also demonstrates that the strategy can underperform materially during choppy or mean-reverting regimes.
Live Activity (31 May – 3 June 2026)
The strategy deployed on 31 May with one initial trade into MSFT at $450.24/share (5 shares). Over the next two sessions it added AAPL at $314.77 (7 shares) and ABBV at $218.75 (11 shares). As of 3 June, the portfolio holds three open positions with cash of $3,139 and total equity of $9,856 — a modest draw from the $10,052 peak on day two, consistent with normal position-building volatility.
Strengths and Risks
Strengths: The OOS fold performance is genuinely encouraging. A Sharpe above 1.8 with a sub-6% drawdown in a live-ish window suggests the channel-breakout logic captured real trending behaviour in recent large-cap price action. The strategy's transparency is also an asset — every signal and exit is fully auditable.
Risks: A 21.73% max drawdown tolerance is significant for a paper account starting at $10,000. Fold 2 demonstrates the strategy's vulnerability to choppy markets — precisely the regime that large-cap equities can sustain for extended periods. The DSR of 0.198 is a statistical warning: with only 6 trials, the edge may not be real. Investors should treat early live results with appropriate scepticism until at least 50–100 more trades have accumulated.