Strategy Overview
The donchian-breakout strategy applies one of the oldest rules in systematic trading: buy when a security reaches a new 20-day high, exit when it falls to a 20-day low. It operates across a universe of 24 U.S. large-caps spanning technology, financials, healthcare, consumer staples, energy, and industrials — household names like AAPL, NVDA, JPM, and KO.
Trend-following strategies of this type are deliberately simple. They make no forecast about intrinsic value; they simply bet that assets moving to new highs tend to keep moving. The edge, when it exists, comes from riding outsized winners and cutting losers mechanically — which is why a sub-40% win rate is entirely normal for the style.
Backtest Snapshot
Across 451 days and 108 trades, the strategy returned +6.95% (CAGR 3.83%), with a Sharpe ratio of 0.34 and a peak drawdown of 21.73%. The win rate sits at 38.46%, consistent with a classic trend-follower that relies on a small number of large winners to offset frequent small losses.
Turnover is high — 2,082% annualised — reflecting the systematic nature of entry and exit signals. Fees totalled $108 across the period (flat $1/trade), modest but worth watching as position sizes scale.
Fold-by-Fold: A Tale of Two Regimes
The four-fold walk-forward validation tells a more nuanced story:
| 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 | +11.35% | 1.86 | 6.01% |
Fold 2 stands out as a significant problem: a −7.46% return with a −1.07 Sharpe during a period that likely included choppy, range-bound conditions where breakout strategies notoriously suffer. The good news is that folds 3 and 4 show strong recovery — consecutive periods with Sharpe ratios above 1.8 and contained drawdowns suggest the strategy can perform well when markets trend cleanly.
Validation Status: Not Yet
The formal validation gate returned failed. The Probabilistic Sharpe Ratio (PSR) of 0.674 implies only a 67% probability that the strategy's Sharpe is genuinely above zero — a meaningful uncertainty after 6 trials. The Deflated Sharpe Ratio (DSR) of 0.198 is more concerning: adjusted for multiple testing across the trial set, the signal looks thin.
The out-of-sample return of +11.35% with a Sharpe of 1.86 (fold 4) is encouraging, but a single out-of-sample fold is not enough to overturn the statistical flags. More live data across a variety of market regimes is needed before confidence in the edge is warranted.
Recent Activity: A Quiet Stretch
The strategy has been in an extended idle period. Every scheduled run from June 12–18 produced zero executions and two to three rejections per session. The portfolio has drifted from roughly $9,466 on June 11 down to $9,264 on June 18 — a mild mark-to-market decline driven by existing positions rather than new activity.
The last block of executions came June 9–10: MSFT was sold at $404.21 (having been bought at $450.24 on May 31, a loss), CAT was sold at $857.78 (bought at $941.58 six days prior, another loss), while KO and UNH were entered on apparent breakout signals. The recent rotation away from high-multiple tech names toward consumer staples and healthcare is characteristic of the strategy following strength wherever it appears in the universe.
Strengths and Risks
Strengths: Simple, transparent logic with no hidden assumptions. The last two folds demonstrate the strategy can generate strong risk-adjusted returns in trending conditions. The large-cap universe limits liquidity risk.
Risks: The 21.73% max drawdown is large relative to a 6.95% total return — the strategy has a poor return-to-pain ratio in aggregate. The failed validation gate reflects real statistical uncertainty, not a technicality. High turnover increases the sensitivity to execution quality and slippage as portfolio size grows.
Donchian-breakout is a work-in-progress worth watching, particularly if the improving fold trajectory holds into the second half of 2026.