The Velocity Strength Filter: -27.5% MDD Before 17.6% CAGR | High Risk

High Risk: Return Versus Risk

While the Velocity Strength Filter boasts an impressive headline CAGR of 17.6 percent, it comes with a substantial maximum drawdown of 27.5 percent, placing it firmly in the high-risk category. Before examining the returns, investors must understand the underlying rules, the volatile return path, and the extended loss periods that define this strategy. This briefing provides an honest look at these risks to help you determine if the strategy is practically tradeable.

Mechanics of the Velocity Strength Filter

The original strategy rebalances weekly across high-beta leveraged ETFs and defensive assets, ranked by a momentum score. A market-regime rule moves the portfolio to the strongest defensive asset when the broad market trend or volatility conditions turn against it, aiming to capture upside while limiting damage in sell-offs.

Optimizing the Momentum Engine

Our adapted version adds three kinds of change: a faster market-health filter, a risk-adjusted momentum ranking that favours steady trends over volatile spikes, and a gradual execution model that reduces risk in steps to limit slippage. The exact rules and parameters are not published.

Verified Backtest Results

In historical simulations, our verified backtest of the Velocity Strength Filter produced a 17.6 percent CAGR, a 0.84 Sharpe ratio, and a 402.9 percent total return, alongside a 27.5 percent maximum drawdown. It is vital to remember that these are historical simulation results, not a guaranteed forecast of future performance. When evaluating this strategy, the depth of the drawdown is just as critical as the return metrics in determining its real-world viability.

Profit And Loss Regimes

Analyzing the equity curve reveals that returns arrive highly unevenly, with the backtest recording 8 positive years and 3 negative years. To judge if this strategy can be held in practice, traders must look beyond the headline CAGR and carefully review the drawdown depth and recovery times. Understanding these distinct profit and loss regimes is essential for surviving the inevitable periods of underperformance.

Verdict: High Risk

Our final verdict classifies the Velocity Strength Filter as a high-risk strategy due to its significant 27.5 percent historical drawdown. Any live implementation would require strict position sizing and robust risk management to survive these deep equity swings. Treat these findings strictly as research, compare them against alternative models, and never assume past backtest performance will repeat in live markets.

Go further on AvalonQuant

• Velocity Strength Filter: re-run backtest — equity curve, max drawdown -27.5%, CAGR 17.6% (2016–2026), and how it ranks by drawdown.
• All strategy backtests — every strategy we re-ran, with equity curves and drawdowns side by side.

Backtests are hypothetical and do not guarantee future results. Not investment advice.