Strategy Thesis
Donchian-breakout applies one of the oldest systematic rules in the trend-following playbook: enter a position when price clears its 20-day high, exit when it falls to its 20-day low. The logic is structural — breakouts above recent ranges signal momentum, while undercuts of recent lows confirm the trend has exhausted. The strategy operates across 24 large-cap US names spanning tech, financials, healthcare, consumer staples, energy, and industrials, giving it broad sector exposure without concentrated bets.
With a 38.5% win rate across 108 backtest trades, the system is designed to lose small and win large — a distribution characteristic of classical trend-following rather than a flaw.
Backtest & Validation Snapshot
Over 451 days the strategy returned +6.95% (3.83% annualised) against a max drawdown of 21.73% — a rough ratio that drags the full-period Sharpe to just 0.34. That figure sits well below the platform's acceptance threshold, and the validation run confirms a failed gate.
Two derived metrics reinforce the caution. The Probabilistic Sharpe Ratio (PSR) of 0.674 means there is roughly a one-in-three chance the true edge is zero or negative given the sample length. The Deflated Sharpe Ratio (DSR) of 0.198 goes further: after penalising for the six parameter trials tested, the adjusted confidence in a genuine alpha signal drops substantially.
The fold breakdown tells a more nuanced story, however:
| 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 | Dec 2025 – May 2026 | +11.35% | 1.86 | 6.01% |
Fold 2 is the wound — a period of sharp reversals and tariff-driven volatility that punished breakout signals badly. Fold 3 and Fold 4 recovered emphatically, with the out-of-sample period (Fold 4) delivering an 11.35% return and a Sharpe of 1.86. Three of four folds are positive, and the trajectory is improving.
Recent Live Activity
The strategy has been running daily scheduled sessions throughout early June 2026. Portfolio equity has drifted from roughly $9,917 on June 4 to $9,444 on June 10, a ~5% pullback over the week. Recent notable moves include:
- CAT: Bought at $941.58 on June 4, sold at $857.78 on June 10 — a round-trip loss consistent with the stop-out rule triggering on a failed breakout.
- MSFT: Bought at $450.24, exited at $404.21 — another stopped-out position.
- KO and UNH: New long entries on June 9–10, signalling fresh breakout signals in defensive names.
- ABBV: Entered at $218.75 on June 3, still open.
The recent session logs show a mix of executions and rejections (cash constraints or signal thresholds not met), with the portfolio holding approximately $1,761 in cash against a total of $9,444 as of June 10.
Strengths and Risks
Strengths:
- The most recent out-of-sample fold is the best one — momentum is aligned, not deteriorating.
- Trend-following strategies are theoretically grounded; the 20-day channel is a transparent, non-overfit rule.
- Diversification across 24 names limits single-stock concentration risk.
Risks:
- The validation gate is closed for good reason: a 21.73% max drawdown against a 6.95% total return is an unfavourable risk-reward profile at the full-period level.
- Fold 2 demonstrates that the strategy can bleed badly in choppy or mean-reverting regimes — the type of environment that can appear without warning.
- High annualised turnover (2,083%) generates friction even at flat per-trade fees; in a live account with market-impact costs the drag would be more meaningful.
- DSR of 0.198 is a statistical warning that the apparent edge may not survive out-of-sample over a longer horizon.
Outlook
Donchian-breakout is a strategy in transition. Its recent two folds suggest the rules are finding genuine trend structure in the current market regime. But one strong quarter does not override the full-period risk profile, and the validation system's DSR penalty for multiple trials is a legitimate safeguard against reading too much into a short run of good results. The strategy warrants continued paper-trading observation — particularly through the next regime shift — before any promotion to a higher capital tier.