The Thesis
Dual-momentum is a rules-based trend-following strategy that ranks a 24-name universe of large-cap US equities — spanning tech, financials, healthcare, consumer staples, and energy — by 60-day return. The logic is deliberate in its simplicity: buy the leaders, hold until the trend breaks, then exit. No discretion, no macro overlay, no news sentiment. Pure price momentum.
Backtest at a Glance
Over 451 days of paper trading, the strategy returned 23.5% on a $10,000 starting portfolio (final equity: $12,349), with a CAGR of 12.52%. The Sharpe ratio of 0.95 sits just below the conventional 1.0 threshold, and the maximum drawdown of 15.67% is meaningful but not unusual for an equity momentum strategy.
The win rate of 28.79% across 136 trades looks low in isolation — but that's characteristic of trend-following, which depends on a small number of large winners offsetting frequent small losses. Turnover of 2,638% signals constant repositioning; in live trading, friction costs would need careful monitoring.
How It Held Up Across Folds
Four walk-forward folds tell a nuanced story:
| Period | Return | Sharpe | Max DD | Trades |
|---|---|---|---|---|
| Aug 2024 – Jan 2025 | +5.85% | 1.23 | 3.92% | 20 |
| Jan 2025 – Jul 2025 | −7.31% | −1.05 | 17.15% | 60 |
| Jul 2025 – Dec 2025 | +25.59% | 3.32 | 4.04% | 16 |
| Dec 2025 – May 2026 | +13.34% | 2.15 | 7.43% | 42 |
Three of four folds were profitable. Fold 2 is the stress test: the strategy churned through 60 trades — nearly half the total — while losing 7.31% and suffering a 17.15% drawdown. That's a textbook momentum whipsaw environment, where prices reverse faster than the 60-day lookback can adapt. Folds 3 and 4 recovered sharply, posting Sharpe ratios of 3.32 and 2.15 respectively once cleaner trends re-established.
Validation: Why It Didn't Pass
Despite the positive headline return, dual-momentum failed formal validation. Two numbers explain why:
- PSR 0.893 — an 89.3% probability the true Sharpe is positive. Encouraging, but not sufficient on its own.
- DSR 0.476 — after deflating for 6 tested configurations, the strategy doesn't clear the statistical significance bar. Multiple-testing bias inflates apparent skill; the Deflated Sharpe Ratio corrects for that, and the result falls short.
In plain terms: the 23.5% total return may partially reflect lucky parameter selection across those 6 trials rather than genuine, repeatable edge. The results are promising — they are not yet conclusive.
Current Status
The strategy has been fully in cash for at least six consecutive scheduled daily runs (June 23–30), with zero trades executed and the full $10,000 portfolio uninvested. This is the exit rule working as designed: no names in the universe currently meet the 60-day momentum entry threshold, so the model waits. Patience is a feature, not a bug, in trend-following.
The Bottom Line
Dual-momentum is a coherent, disciplined approach with a real track record across multiple market regimes. Its weaknesses — low win rate, high turnover, a brutal Fold 2 — are structural properties of trend-following, not signs of a broken model. The validation failure is the key risk flag: a DSR below 0.5 across 6 trials means the statistical case for deploying real capital isn't established yet. More out-of-sample history, or reducing the number of tested parameter configurations, would meaningfully strengthen that case. Worth watching; not yet ready to scale.