The Thesis
Dual-momentum is a systematic trend-following strategy built on a direct premise: own the strongest names over the prior 60 trading days, and exit the moment that trend breaks. Applied across a 24-stock universe of large-cap U.S. equities — spanning technology, financials, healthcare, consumer staples, and energy — the strategy aims to ride secular momentum while avoiding prolonged drawdowns through disciplined, rules-based exits.
Backtest in Brief
Over 451 days of simulation, dual-momentum produced a total return of 23.5% (CAGR ~12.5%), with final equity reaching $12,350. The headline Sharpe ratio of 0.95 sits in respectable but unremarkable territory. Maximum drawdown peaked at 15.67% — meaningful, but within the range expected for an equity trend strategy.
The win rate of 28.8% deserves context: trend-following is structurally designed around infrequent large gains offsetting frequent small losses. What merits scrutiny is the 2,638% annual turnover — nearly 26× portfolio rotation across 136 trades. High churn compresses net returns as friction accumulates, and the $136 in total recorded fees almost certainly understates real-world slippage at that velocity.
Cross-Validation: A Mixed Picture
The strategy was stress-tested across four time-boxed folds spanning August 2024 to May 2026. Three of four folds were profitable, but return dispersion is wide:
| 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% |
Fold 2 is the clearest stress point: a 17% drawdown on 60 trades illustrates what happens when momentum rotates violently mid-period. Fold 3 is the standout — a 25.6% gain with a Sharpe above 3 and a drawdown under 5%, suggesting the strategy is particularly suited to clean, trending markets.
Formal validation did not pass. The Probabilistic Sharpe Ratio (PSR) of 0.893 is encouraging — roughly an 89% probability the true Sharpe is positive — but the Deflated Sharpe Ratio (DSR) of 0.476 falls short of the passing threshold. DSR penalises strategies for the breadth of their parameter search; with six trial configurations on the books, some portion of the observed edge may reflect fitting rather than a durable signal.
Recent Activity: Fully Defensive
The last six scheduled runs — June 17 through June 24 — executed zero trades. The strategy is holding full cash at $10,000. When no name in the 24-stock universe clears the 60-day momentum threshold, the algorithm stands aside entirely. A choppy or rotation-driven market environment can produce exactly this behavior: the strategy treats inaction as a position.
Strengths and Risks
Strengths: The out-of-sample fold (fold 4, Sharpe 2.15) is the most credible data point and is genuinely encouraging. Drawdowns in the three positive folds were contained, validating the trend-exit discipline. The universe is liquid, avoiding the micro-cap noise that distorts many momentum backtests.
Risks: The DSR failure is a genuine yellow flag — multiple parameter trials inflate the risk of overfitting. Fold 2's 17% drawdown and 60-trade burst reveals vulnerability during trend reversals. High turnover also makes live execution sensitive to market-impact costs that the current backtest does not fully capture.