The Thesis
Donchian breakout is a classic trend-following rule: buy when price makes a new 20-day high, exit when it prints a new 20-day low. It trades a 24-name universe of large-cap U.S. equities — mega-cap tech (AAPL, MSFT, NVDA), financials (JPM, V, MA), healthcare (UNH, JNJ), and staples/industrials (KO, PG, CAT, XOM). The bet is simple and time-tested: let winners run, cut laggards, and accept that most trades will be small losers.
Backtest Performance
Over 451 days the strategy returned 6.95% (final equity $10,695 on a $10k base), a 3.83% CAGR. That headline masks the character of the system. The win rate is just 38.46% across 108 trades — exactly what you'd expect from breakout trend-following, where a handful of large winners must pay for a majority of small stops. The problem is the reward side hasn't shown up: a Sharpe of 0.34 is weak, and a 21.73% max drawdown is a steep price for single-digit returns. Turnover of 2,083% is also punishing — the book churns roughly 20x, and $108 in fees is a direct, recurring drag on thin edges.
Validation: Did Not Pass
Our walk-forward gate flagged this strategy as not passing. The nuance is worth reading. Three of four folds were positive, and the out-of-sample segments were genuinely strong — the most recent fold returned 11.35% at a 1.86 Sharpe, and fold 3 posted 14.09% at a 2.72 Sharpe with a tiny 3.14% drawdown. But fold 2 (Jan–Jul 2025) lost 7.46% at a -1.07 Sharpe, exposing how badly the rule bleeds in choppy, whipsaw regimes.
The statistical adjustments are where it fails. With 6 trials searched, the Deflated Sharpe Ratio falls to 0.198 and the Probabilistic Sharpe sits at 0.674 — below the confidence we require to call the edge real rather than a product of selection. Strong recent folds are encouraging, but not enough to overrule the deflated numbers.
Recent Activity: Idle
Most telling is what the live account is not doing. The last executed fills were back on June 10 (buys in KO and UNH, sells in CAT and MSFT). Since then, six consecutive scheduled runs — July 13 through 20 — executed zero trades and rejected every candidate. Cash has been frozen at $1,760.89 the entire window, with total equity drifting between roughly $9,863 and $10,089, i.e. hovering around break-even to slightly underwater. Persistent rejections suggest the account is either fully allocated or blocked by sizing/cash constraints, and no fresh breakout has cleared the filter.
Verdict
The recent out-of-sample folds are the bull case; the failed validation gate, weak Sharpe, deep drawdown, and a week of dead runs are the bear case. Donchian-breakout is a coherent, honest trend system — but until it clears validation and starts putting idle cash back to work, it stays on the watchlist rather than the promotion track.