Strategy Thesis
Donchian breakout is a classic trend-following rule: buy when a ticker closes at a new 20-day high, exit when it breaks to a new 20-day low. The universe spans 24 large-cap U.S. names across tech, financials, healthcare, consumer staples, and energy — a deliberately broad, liquid set that gives the strategy ample breakout candidates without straying into thin markets.
The appeal is simplicity and regime-agnosticism. The strategy holds no view on valuation; it rides momentum until the trend breaks. That makes it naturally long volatility and well-suited to trending markets, while its automatic exit rule limits runaway losses.
Backtest at a Glance
Over 451 days of simulation, donchian-breakout returned +6.95% on a starting equity of ~$10,000, finishing at $10,695. The annualised CAGR works out to 3.83% — modest but above zero. Turnover is high at 2,083%, reflecting the strategy's active churn across 108 trades.
The headline metrics tell a nuanced story:
| Metric | Value |
|---|---|
| Total return | +6.95% |
| CAGR | 3.83% |
| Sharpe ratio | 0.34 |
| Max drawdown | 21.73% |
| Win rate | 38.46% |
| Trades | 108 |
A Sharpe of 0.34 is weak by most standards — the strategy earns roughly a third of a unit of return per unit of risk. A 21.73% maximum drawdown is a meaningful equity haircut for a paper-trading account. Win rate below 40% is expected for trend-followers (losses are frequent; gains are larger) but heightens the psychological demand on the system to hold through losing streaks.
Walk-Forward Validation: Mixed Signal
The four-fold walk-forward tells a more interesting story than the full-period numbers suggest:
| 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 most recent out-of-sample fold (Fold 4) is the strongest: +11.35% with a Sharpe of 1.86 and a drawdown of only 6.01%. That is genuinely encouraging — the strategy appears to be improving or the recent market regime happens to suit it.
Fold 2, however, was a significant failure: −7.46% with a Sharpe of −1.07 and a 15.58% drawdown. This aligns with a choppy, range-bound market environment where breakouts tend to whipsaw. Trend-following strategies are well-known to underperform in such conditions, and this fold is a clean illustration of that vulnerability.
Formally, the strategy did not pass validation. The Probabilistic Sharpe Ratio (PSR) sits at 0.674 and the Deflated Sharpe Ratio (DSR) at 0.198 — both below commonly used thresholds, and the DSR in particular reflects the penalty for multiple testing across six trials. The headline Sharpe of 0.34 does not clear the bar needed to confirm the edge is real and not an artefact of sample selection.
Recent Live Activity
The most recent executed trades (early-to-mid June 2026) show the strategy rotating into KO, UNH, CAT, ABBV, and AAPL while exiting MSFT (sold at $404.21 after buying at $450.24 — a losing trade) and CAT (sold at $857.78 after buying at $941.58 — also a loss). The strategy has been quiet for the past week, with daily runs from June 19–26 recording zero executions and two to three rejections per day. Cash sits at $1,760.89 against a total portfolio value of roughly $9,586 — down from the strategy's backtest peak equity.
The pattern of rejections suggests the strategy is not finding qualifying breakouts in the current market, which is consistent with a consolidating or mean-reverting environment.
Strengths and Risks
Strengths: The recent fold performance is the most compelling data point — if the market has re-entered a trending regime, donchian-breakout is positioned to capitalise. The rule-based exit also means the strategy self-manages downside without requiring human intervention.
Risks: A sub-0.2 DSR means the statistical case for a real edge is weak. High turnover ($108 in fees across 108 trades) erodes already thin returns. The 21.73% maximum drawdown may exceed risk tolerance for capital deployed beyond paper-trading. And Fold 2 is a reminder that any sustained choppy market will punish this strategy hard.
Watch Fold 4 momentum closely over the next quarter. If the live portfolio continues its recent trajectory, the validation picture may improve materially.