Thesis and Approach
Dual-momentum is a trend-following strategy with a straightforward premise: hold the strongest-performing names from a 24-stock large-cap universe — spanning technology, financials, healthcare, consumer staples, and energy — ranked by 60-day return, and exit when that trend breaks. The logic is intuitive: momentum is one of the most replicated factors in empirical finance, and applying it to a curated blue-chip universe bounds the downside universe considerably.
Backtest Overview
Over 451 trading days, the strategy produced a 23.5% total return (12.52% annualised), finishing with a paper equity of $12,349 on a $10,000 stake. The Sharpe ratio of 0.95 sits comfortably above 0, and a maximum drawdown of 15.67% is tolerable for an equity-only momentum system.
Two numbers, however, warrant attention:
- Win rate of 28.79% — fewer than 3 in 10 trades close in profit. This is structurally expected for trend-following (the edge comes from asymmetric payoffs, not batting average), but it demands that losers be cut cleanly and the few winners run long. A system with this profile is particularly sensitive to execution discipline.
- Turnover of 2,638% — across 136 trades in under 15 months, the portfolio churns aggressively. Even at $1 per trade in simulated fees (totalling $136), real-world slippage and spread costs on this churn could materially compress returns.
Cross-Validation: A Mixed Picture
The four-fold walk-forward analysis is where the picture becomes more nuanced.
| Fold | Period | Return | Sharpe | Max DD | Trades |
|---|---|---|---|---|---|
| 1 | Aug 2024 – Jan 2025 | +5.85% | 1.23 | 3.92% | 20 |
| 2 | Jan 2025 – Jul 2025 | −7.31% | −1.05 | 17.15% | 60 |
| 3 | Jul 2025 – Dec 2025 | +25.59% | 3.32 | 4.04% | 16 |
| 4 | Dec 2025 – May 2026 | +13.34% | 2.15 | 7.43% | 42 |
Three of four folds are positive, and the most recent (Fold 4, which serves as the out-of-sample proxy) delivered a 13.34% return with a Sharpe of 2.15 — the kind of quality that warrants genuine interest. Fold 2 is the cautionary tale: a −7.31% return coupled with 60 trades (nearly 4× the activity of the best fold) suggests the strategy over-traded during a choppy, trendless market — precisely the environment where 60-day momentum signals degrade.
The formal validation result is failed. The Probabilistic Sharpe Ratio (PSR) of 0.893 is encouraging — there is an 89% probability the true Sharpe exceeds a benchmark — but the Deflated Sharpe Ratio (DSR) of 0.476 falls below the standard 0.5 threshold once adjusted for the number of trials (6). With only six parameter combinations tested, this is a narrow miss rather than a damning indictment, but it is a flag that the backtest Sharpe may be partially the result of selection.
Recent Activity
Since deployment on 31 May 2026 with a $10,000 paper stake, the strategy has completed six daily scheduled runs — all returning zero trades. The portfolio sits fully in cash. This could reflect a genuine absence of qualifying momentum signals in the current market environment, or a signal threshold that is currently too tight. Either way, it is too early to draw conclusions from live behaviour.
Risks to Monitor
- Regime sensitivity: the strategy's worst fold (Jan–Jul 2025) coincided with elevated churn, a reliable sign of a mean-reverting regime that punishes momentum systems.
- Turnover costs: simulated fees understate real friction at this churn level.
- DSR borderline: a wider parameter search or longer live history will be needed to gain higher confidence the edge is genuine and not a backtest artefact.