Strategy Thesis
Donchian breakout is one of the oldest rules in systematic trading: buy when a stock closes at a 20-day high, exit when it closes at a 20-day low. The logic is regime-capture — breakouts signal that buyers have absorbed overhead supply and a new trend may be forming. Applied across a 24-stock universe spanning technology, financials, healthcare, consumer staples, and energy, the strategy bets that large-cap leaders will trend long enough to overcome the inevitable whipsaws.
Recent Activity
The strategy has been in a holding pattern since mid-June. Daily scheduled runs from June 16 through June 23 each fired with zero executions and two to three rejected signals, while the portfolio mark-to-market drifted between $9,258 and $9,488 on roughly $1,761 in cash (about 19% idle).
The last wave of executed trades ran June 2–10. In that window the strategy bought KO (23 shares at $83.69), UNH (3 shares at $412.62), ABBV (11 shares at $218.75), AAPL (7 shares at $314.77), and CAT (2 shares at $941.58), while selling a short-lived CAT position (exited at $857.78, a loss from the $941.58 entry) and rotating out of MSFT (sold 5 shares at $404.21 after entering at $450.24). The CAT and MSFT exits illustrate the 20-day low stop in practice: the strategy entered breakouts that failed to follow through and was forced to cut quickly.
Backtest & Validation Performance
Over 451 days and 108 trades, the full-period backtest shows:
| Metric | Value |
|---|---|
| Total Return | +6.95% |
| CAGR | 3.83% |
| Sharpe Ratio | 0.34 |
| Max Drawdown | 21.73% |
| Win Rate | 38.46% |
| Turnover | 2,083% |
A 38% win rate is normal for trend-following — the strategy's edge must come from letting winners run far enough to offset frequent small stops. The backtest turnover of over 2,000% underscores how aggressively the system cycles through positions, making fee management critical at any real scale.
Walk-Forward Fold Analysis
The four-fold walk-forward picture is uneven but directionally encouraging:
| 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% |
Folds 3 and 4 — the most recent half of the test window — are genuinely strong. An out-of-sample Sharpe of 1.86 with a drawdown below 7% would be competitive in any systematic portfolio. Three of four folds were profitable.
Why Validation Failed
Despite the recent momentum, the strategy did not pass Headmars' automated validation gate. The full-period Sharpe of 0.34 is weak, and the Deflated Sharpe Ratio (DSR) of 0.198 — which penalizes for the six parameter or strategy variants trialed — indicates only a 20% probability that the observed edge survives multiple-comparison adjustment. The Probabilistic Sharpe Ratio of 0.674 is more forgiving but still below the 0.95 threshold used for auto-approval.
Strengths & Risks
Strengths: The logic is transparent and time-tested. Fold 2 aside, the strategy has navigated most market regimes profitably, and the recency trend (folds 3–4) suggests it may have found a better-fitting market environment. The 24-stock universe provides sector diversification.
Risks: The 21.73% max drawdown is significant relative to the return it generated. The failed validation gate is a formal signal that the edge has not been reliably isolated from noise across trials. Idle recent sessions with repeated rejections suggest the strategy is waiting for breakout conditions that haven't materialized, which could mean a prolonged flat period ahead.