Strategy Thesis
Donchian-breakout applies one of systematic trading's oldest rules: buy when a security closes at a 20-day high, exit when it closes at a 20-day low. The universe covers 24 large-cap US names spanning technology, financials, healthcare, consumer staples, energy, and industrials — a diversified but deliberate list that avoids speculative or micro-cap risk. The logic is pure trend-following: let winners run until the market proves the trend has reversed.
Backtest Snapshot
Over 451 trading days, the strategy compounded to a 6.95% total return on a $10,000 paper account, ending at $10,695.11. That translates to a CAGR of 3.83% — respectable for a passive trend filter, but not yet competitive with simply holding the index.
The headline risk numbers deserve attention. A max drawdown of 21.73% is steep for a large-cap-only system, and a Sharpe ratio of 0.34 signals that returns are not coming smoothly. The win rate of 38.46% across 108 trades is expected for trend-following — the model is designed to cut losers quickly and ride outlier winners — but it places significant psychological and capital demand on surviving losing streaks.
Turnover is high at 2,082% annualised, which in a live account would translate to meaningful friction. The backtest accounts for a flat $1 fee per trade ($108 total), likely understating real-world slippage on some of the less-liquid names in the universe.
Walk-Forward Validation
The strategy was evaluated across four sequential folds. Three of the four were positive, but the path was uneven:
| 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% |
Fold 2 stands out as the stress period — a mid-2025 environment that punished breakout entries hard, with a 15.58% intra-fold drawdown. The recovery in folds 3 and 4 is striking: both delivered double-digit returns with Sharpe ratios above 1.8, suggesting the strategy is genuinely suited to trending, low-chop regimes.
Despite that late-period strength, the strategy failed Headmars' validation gate. The Probabilistic Sharpe Ratio (PSR) sits at 0.674 and the Deflated Sharpe Ratio (DSR) at 0.198 across six parameter trials — indicating the measured edge is not yet statistically distinguishable from chance at the required confidence threshold. The fold-2 drawdown is the primary drag on those scores.
Recent Live Activity
The past week has been unusually quiet. Daily scheduled runs from July 1–8 show zero executed trades, with between one and three candidates rejected each session. The portfolio is holding roughly $1,761 in cash against a total value near $9,957. The last confirmed executions were in mid-June: a KO buy, UNH entry, and a MSFT round-trip that closed at a loss (bought at $450.24, sold at $404.21).
The rejection cadence suggests the strategy is not finding clean 20-day highs in the current environment — consistent with a market that may be consolidating or chopping rather than trending cleanly.
Strengths and Risks
Strengths. The rule set is simple, transparent, and time-tested. Folds 3 and 4 demonstrate that when macro conditions cooperate, this strategy can deliver strong risk-adjusted returns. The recent trade-rejection behaviour also shows the system is disciplined — it does not force entries.
Risks. The failed DSR/PSR validation is the most important signal to watch. With only six parameter trials evaluated and one severe negative fold on record, the edge needs more data before it can be trusted with real capital. The 21.73% maximum drawdown is also wider than most investors would accept in a large-cap equity strategy. And high turnover means live execution costs will compress net returns materially versus the backtest figures shown here.