The Thesis
Donchian Breakout applies a textbook trend-following rule to a 24-stock universe of large-cap U.S. equities spanning technology, financials, healthcare, consumer staples, energy, and industrials. Entry fires when a name closes at a new 20-day high; the position exits when it closes at a new 20-day low. No prediction, no fundamental overlay — just systematic momentum capture.
The simplicity is deliberate. Donchian-channel systems carry a decades-long practitioner pedigree, and their edge, when it exists, comes from riding sustained trends while mechanically cutting positions that roll over.
Backtest Snapshot
Over 451 days and 108 trades, the strategy returned +6.95% (3.83% annualised CAGR) on a starting equity of $10,000. The risk profile is squarely trend-following in character: a 21.73% maximum drawdown and a 38.46% win rate. Both figures are typical of the style — large-trend strategies lose more often than they win and depend on a handful of outsized moves to compensate.
The aggregate Sharpe of 0.34 falls below the conventional 0.5 threshold, and the validation framework reflects this. With a PSR of 0.674 and a DSR of 0.198 across six trials, the strategy did not pass its quantitative gate — the observed Sharpe is not yet statistically distinguishable from noise at the required confidence level.
Walk-Forward Analysis
The four-fold cross-validation tells a more interesting story than the headline numbers suggest:
| Fold | Period | Return | Sharpe | Max DD |
|---|---|---|---|---|
| 1 | Aug 2024 – Jan 2025 | +0.73% | 0.21 | 6.71% |
| 2 | Jan – Jul 2025 | −7.46% | −1.07 | 15.58% |
| 3 | Jul – Dec 2025 | +14.09% | 2.72 | 3.14% |
| 4 | Dec 2025 – May 2026 (OOS) | +11.35% | 1.86 | 6.01% |
Folds 3 and 4 are genuinely strong — an out-of-sample Sharpe of 1.86 with a 6% maximum drawdown is well above average for a mechanical system. Three of four folds finished positive. Fold 2, however, was the strategy's stress test: a choppy, mean-reverting first half of 2025 produced a 15.58% drawdown and a −1.07 Sharpe. That single fold compressed the aggregate score enough to fail validation.
Recent Live Activity
The strategy has been running on a daily schedule since late May 2026. Recent executions show the system cycling through its universe:
- May 31 – Jun 4: Entered MSFT, AAPL, ABBV, and CAT on 20-day high signals
- Jun 9: Exited MSFT at $404.21 (entry $450.24) as it breached its 20-day low; rotated into UNH at $412.62
- Jun 10: Exited CAT at $857.78 (entry $941.58); added KO at $83.69
- Jun 11–12: Zero executions — no new breakout signals met the threshold
The paper portfolio has pulled back from ~$9,829 on June 5 to $9,417 on June 12, a roughly 4% near-term decline driven by the MSFT and CAT exits. Cash of $1,760.89 sits idle, waiting for the next breakout cluster.
Strengths and Risks
Strengths: The rule set is transparent and reproducible. Momentum literature broadly supports 20-day breakout systems on liquid large-caps, and the two most recent periods demonstrate the strategy can perform well in trending markets with controlled drawdowns.
Risks: A 21.73% peak-to-trough drawdown is substantial for a large-cap-only mandate, and the low win rate demands capital diversification and process discipline. Most importantly, the PSR/DSR validation gap is real — until more live data accumulates and narrows the confidence interval, this strategy warrants paper-trading size only. The current trajectory is encouraging; it is not yet a cleared signal.