The Thesis
Donchian Breakout is a classic trend-following system: it buys when price makes a new 20-day high and exits when price makes a new 20-day low. It runs over a 24-name large-cap universe spanning tech (AAPL, MSFT, NVDA), financials (JPM, V, MA), healthcare (JNJ, UNH, ABBV), and staples/industrials (KO, PG, CAT, XOM). The design bet is simple and well-documented in the literature: cut losers quickly, let winners run, and accept a low hit rate in exchange for occasional large trends.
Backtest and Validation
Over 451 days the strategy returned 6.95% (final equity $10,695), a 3.83% CAGR with a 0.34 Sharpe and a 21.73% max drawdown. The win rate is 38.46% across 108 trades — right in line with trend-following's low-hit-rate, positive-expectancy profile. Turnover is heavy at 2,083%, though total fees came to just $108 with no FX cost.
The walk-forward validation is where the picture gets interesting. Three of four folds were positive, and the two most recent were genuinely strong: fold 3 returned +14.09% (Sharpe 2.72) and fold 4 returned +11.35% (Sharpe 1.86). The out-of-sample tail looks better than the full-sample average. But fold 2 was ugly — −7.46% at a −1.07 Sharpe — and the composite gate failed. The deflated Sharpe ratio sits at just 0.198 against a probabilistic Sharpe of 0.674, and with 6 trials logged, the framework is appropriately discounting the headline numbers for multiple-testing risk. In plain terms: the recent results are promising, but not yet distinguishable from luck at our confidence bar.
Recent Live Activity
Here is the sharpest caution flag. The last executed trades were on 12–13 August (buying V and MA, selling AAPL and UNH). Every scheduled run since 9 September has produced the same result: 0 executed, 1–2 rejected, with cash frozen at exactly $1,510.88. Signals are firing but orders are not clearing — most likely a position-sizing or available-cash constraint rather than a lack of breakouts. Meanwhile the live book has drifted between roughly $9,824 and $10,025, currently sitting slightly under its starting stake.
Strengths and Risks
Strengths: a transparent, rules-based edge; strong recent out-of-sample folds; low fee drag; and a diversified quality universe.
Risks: the strategy failed validation, and the 0.198 deflated Sharpe warns against over-crediting the good folds. The 21.73% drawdown and fold-2 loss show real downside, and the low win rate demands patience through long losing streaks. Most urgently, the persistent rejected orders mean the live strategy is effectively idle — worth investigating before its edge, if real, can compound.
Verdict: watch, don't scale. Fix the execution blockage, then let more out-of-sample evidence accumulate before promoting it.