Strategy Thesis
Donchian-breakout applies one of the oldest rules in systematic trading: buy when price makes a new 20-day high, exit when it falls to a new 20-day low. The logic is straightforward — a breakout into new territory signals momentum worth following; a new low signals the trend has reversed. The strategy operates across a 24-stock universe of large-cap US names spanning technology, financials, healthcare, consumer staples, and energy.
Backtest Snapshot
Over 451 backtested days, donchian-breakout produced a total return of 6.95% on a $10,000 starting stake, compounding to a 3.83% CAGR.
| Metric | Value |
|---|---|
| Total Return | 6.95% |
| CAGR | 3.83% |
| Sharpe Ratio | 0.34 |
| Max Drawdown | 21.73% |
| Win Rate | 38.46% |
| Trades | 108 |
A sub-40% win rate is typical for trend-following systems — the edge comes from a handful of large winners absorbing many small losses, not from being right most of the time. The 21.73% max drawdown is the sharpest concern: recovering from a drawdown of that magnitude demands patience and a high tolerance for paper losses.
Walk-Forward Performance
The four-fold walk-forward validation tells a more nuanced story than the headline return.
| 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% |
Three of four folds are positive, and the two most recent out-of-sample periods are the strongest. Fold 2 was a rough stretch — the choppy, macro-driven volatility of early-to-mid 2025 is precisely the environment where momentum strategies bleed. Folds 3 and 4 recovered with conviction, posting Sharpe ratios of 2.72 and 1.86 respectively alongside contained drawdowns.
Despite that trajectory, the strategy did not pass the validation gate. A Probabilistic Sharpe Ratio of 0.674 and a Deflated Sharpe Ratio of just 0.198 — penalized across 6 trial runs — indicate insufficient statistical confidence that the observed edge is real rather than an artifact of parameter search. The DSR is a hard warning, not a soft one.
Recent Activity
The week of June 11–17 was quiet: zero trades executed across five daily runs, with two to three signals rejected each session. Portfolio value drifted from $9,466 to $9,302 — mark-to-market movement in existing positions, not new entries. The last two active days, June 9–10, saw the system rotate out of MSFT into UNH and swap CAT for KO, each move triggered mechanically by the 20-day channel rules.
Risks and Outlook
The key risks are well-defined. Trend-following underperforms in range-bound markets, and the 21.7% drawdown ceiling demands a long time horizon. More critically, the failed DSR gate signals meaningful overfitting risk — with six tested configurations, even genuine-looking out-of-sample numbers need more runway to be trusted.
The improving fold trajectory is a real positive and warrants continued monitoring. But statistically, donchian-breakout has not yet earned a capital commitment. Live paper-trading remains the right status: accumulate more out-of-sample evidence, let the recent strong folds compound their case, and revisit the validation gate in another full fold's worth of data.