Thesis
Dual-momentum is one of the oldest systematic edges in equities: rank a fixed universe by 60-day price return, hold the strongest names, and exit when a trend breaks. The strategy runs across 24 large-cap U.S. names spanning tech, financials, healthcare, consumer, and energy — a diversified universe that limits single-sector concentration while keeping liquidity high.
Backtest Performance
Over 451 days of simulation the strategy grew a $10,000 paper portfolio to $12,349.63, a total return of 23.5% and an annualised CAGR of 12.52%. The Sharpe ratio came in at 0.95, a respectable risk-adjusted result for a rules-based momentum approach.
The headline numbers carry an asterisk. With 136 trades and a turnover figure of 2,638%, the engine is rotating frequently — and at $1 per trade in simulated fees, cost drag is already baked in. The win rate of 28.79% is characteristically low for trend-following: most positions are small losers, with returns concentrated in a handful of outsized winners. That asymmetry is a feature, not a bug, but it means performance is sensitive to whether the best trades actually fire.
Maximum drawdown reached 15.67% — meaningful but not alarming for an equity-only strategy over a period that included notable market volatility.
Cross-Validation: Strengths and Cracks
The walk-forward validation ran four folds spanning August 2024 through May 2026.
| 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 period (Fold 4) returned +13.34% with a Sharpe of 2.15 — the strongest risk-adjusted fold in the series. That is an encouraging signal.
Fold 2, however, was a significant detractor: a −7.31% loss with a 17.15% drawdown and 60 trades fired in five months. That burst of activity in a losing environment is the clearest red flag in the data set.
Validation Gate: Not Yet Cleared
Despite the positive out-of-sample fold, the strategy did not pass the Headmars validation gate. The key metrics:
- PSR (Probabilistic Sharpe Ratio): 0.893 — high, suggesting the observed Sharpe is likely above zero.
- DSR (Deflated Sharpe Ratio): 0.476 — this is the concern. The DSR adjusts for the number of trials tested (6 in this case); a value below 0.5 means there is more than a 50% chance the observed edge is a statistical artifact of search rather than a genuine signal.
With six parameter trials on a 451-day dataset, the multiple-testing penalty is real. The PSR looks promising, but the DSR says the bar has not been cleared at the current level of evidence.
Current Status: Watching and Waiting
For the past six trading sessions (June 12–18), the strategy executed zero trades — running on schedule each day but finding no names in the universe that meet its entry criteria. The full $10,000 paper portfolio sits in cash.
This is expected behavior in a regime where recent 60-day momentum signals are flat or ambiguous. The engine is not broken; it is simply waiting for a trend to emerge.
Outlook
Dual-momentum has a theoretically sound foundation and a credible out-of-sample record in its most recent fold. The path to clearing the validation gate likely runs through more live data — additional folds will either reinforce the DSR or expose further fragility. The strategy is worth watching, but capital allocation should wait for a passing DSR.