Strategy Overview
Donchian Breakout is a classic price-channel trend-follower: buy when a stock closes at a new 20-day high, exit when it closes at a new 20-day low. The universe covers 24 large-cap U.S. equities across tech, financials, healthcare, consumer, energy, and industrials — a diversified but familiar blue-chip roster. The logic is deliberately mechanical: no earnings filters, no macro overlays, no sentiment adjustments. Rules in, signals out.
Recent Activity
The strategy has been live and running daily scheduled jobs, but the past week has been conspicuously quiet. Every session from July 3 through July 10 logged zero executed trades, with between one and three signals rejected per run. Portfolio value oscillated in a narrow band — from roughly $9,883 to $10,005 — suggesting the market has not presented clean 20-day breakout setups that clear the strategy's filters.
The last executed trades date to early-to-mid June: a buy of Coca-Cola (KO) at $83.69, a round-trip on Caterpillar (CAT) — bought at $941.58 on June 4, sold at $857.78 on June 10 for a notable per-share loss — and entries in UNH, ABBV, AAPL, and MSFT. The CAT sequence illustrates one of the strategy's inherent characteristics: it can enter near a local top if a channel breakout proves false, then get stopped out on the 20-day low exit before recovering.
Backtest and Walk-Forward Performance
Over 451 days and 108 trades, the full-sample backtest shows:
| Metric | Value |
|---|---|
| Total Return | +6.95% |
| CAGR | 3.83% |
| Sharpe Ratio | 0.34 |
| Max Drawdown | −21.73% |
| Win Rate | 38.46% |
| Annual Turnover | ~2,083% |
A Sharpe of 0.34 is below most institutional thresholds (typically ≥1.0), and a max drawdown of nearly 22% is steep relative to the return generated. A sub-40% win rate is expected for trend-following — the thesis is that winners run far longer than losers — but the aggregate return does not yet demonstrate that the winners are running far enough.
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 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 period produced an impressive Sharpe of 1.86 on an 11.35% return. That is genuinely encouraging — the strategy's most recent out-of-sample behavior is its best. However, Fold 2 lost 7.46% with a Sharpe of −1.07, demonstrating meaningful regime sensitivity. Trend-following systematically underperforms in choppy, mean-reverting markets, and Fold 2 likely captured such a period.
The validation gate remains not passed: the Probabilistic Sharpe Ratio (PSR) of 0.674 and Deflated Sharpe Ratio (DSR) of 0.198 — which adjust for multiple-testing bias across six trials — do not meet the thresholds required for automated deployment approval. This is the right call: DSR below 0.5 signals that the observed Sharpe could plausibly be an artifact of parameter search rather than genuine edge.
Strengths
- Simple, auditable rules with no curve-fit overlays
- Recent momentum: Folds 3 and 4 show the strategy may have found its regime
- Controlled drawdowns in recent folds: both under 7%, a significant improvement over the full-period max
Risks
- Regime dependence: one bad fold erased nearly all multi-fold gains
- High turnover: ~2,083% annually generates substantial friction cost even with $1/trade fees
- Low DSR: the validation framework is correctly skeptical; six trials with this Sharpe profile carry meaningful false-discovery risk
- Current inactivity: a prolonged signal drought may indicate the market is in a choppy regime where the strategy historically struggles
Outlook
Donchian Breakout is a credible first-generation trend-follower doing exactly what it advertises. The validation framework's caution is well-placed — more live history across varied regimes is needed before scaling capital. The strategy is worth watching through another full market cycle, particularly to see whether the recent strong-fold momentum persists or reverts.