What the Strategy Does
Dual-momentum is one of the cleaner ideas in systematic equity trading: rank a 24-name universe of large-cap US stocks by their 60-day return, hold the strongest trending names, and exit when a trend breaks. No earnings forecasts, no macro calls — just price momentum as the signal. The universe spans mega-cap tech (AAPL, MSFT, NVDA), financials (JPM, V, MA), healthcare (JNJ, UNH), consumer staples, and energy, giving the strategy broad sector exposure without a deliberate tilt.
Backtest Headline Numbers
Over 451 days of paper trading, the strategy returned 23.5% on a $10,000 starting equity, finishing at $12,349.63 — a CAGR of 12.52%. The Sharpe ratio of 0.95 is respectable for a trend-follower, and the maximum drawdown of 15.67% stayed within a range most traders would consider manageable.
Two numbers deserve scrutiny. First, the win rate of 28.79% across 136 trades is deliberately low — momentum strategies make money by riding large winners and cutting losses quickly, not by being right most of the time. That's by design. Second, turnover of 2,638% is high; at $1 per trade in fees ($136 total), the paper-trading cost model is optimistic. Real-world slippage and commissions could meaningfully erode returns at this churn rate.
Walk-Forward Validation: The Red Flag
The validation framework split the backtest into four chronological folds, and the results tell a nuanced story.
| Fold | Period | Return | Sharpe | Max DD |
|---|---|---|---|---|
| 1 | Aug 2024 – Jan 2025 | +5.85% | 1.23 | 3.92% |
| 2 | Jan 2025 – Jul 2025 | −7.31% | −1.05 | 17.15% |
| 3 | Jul 2025 – Dec 2025 | +25.59% | 3.32 | 4.04% |
| 4 | Dec 2025 – May 2026 | +13.34% | 2.15 | 7.43% |
Three of four folds were positive, and the out-of-sample (OOS) period — Fold 4 — produced a 13.34% return with a 2.15 Sharpe, which is encouraging. However, the validation framework returned failed. The culprit is the Deflated Sharpe Ratio (DSR of 0.476), which accounts for the number of trials (6) run during strategy development. With a PSR of 0.893 but DSR nearly halving that, the framework is correctly flagging that the headline Sharpe may be partially a product of selection bias rather than edge.
Fold 2's −7.31% return with a 17.15% drawdown is the strategy's stress test on record. That period likely captured choppy, range-bound or reversal-dominated market conditions — exactly the environment where momentum strategies underperform. The strategy's recovery in Fold 3 (+25.59%, Sharpe 3.32) is impressive but also raises the question: how much of the full-period return is concentrated in a single favorable regime?
Recent Activity: Sitting on the Sidelines
The past week (June 2–9) shows six consecutive scheduled runs with zero trades executed. The portfolio holds $10,000 in cash and has no open positions. This is consistent with the strategy's exit-on-trend-break rule — if no names in the universe are showing sufficient 60-day momentum, the correct action is to hold cash and wait. Whether the current flat period reflects genuine signal absence or a misconfiguration is worth monitoring.
Strengths and Risks
Strengths: Simple, interpretable logic. Positive OOS return. High Sharpe in recent folds. Broad universe reduces single-stock concentration risk.
Risks: Failed DSR suggests overfitting exposure. High turnover amplifies real-world friction costs. Deep sensitivity to market regime — a sustained choppy or mean-reverting market (as seen in Fold 2) can produce significant drawdowns. Extended cash periods may indicate the signal is currently muted.
Dual-momentum is a strategy worth watching, but not yet one to follow uncritically. The validation system is doing its job by flagging the DSR concern — that caution is the right response.