{"id":44,"date":"2026-08-19T03:14:31","date_gmt":"2026-08-19T03:14:31","guid":{"rendered":"https:\/\/quant.avalonquant.com\/2026\/08\/the-velocity-strength-filter-274-mdd.html"},"modified":"2026-10-16T16:20:29","modified_gmt":"2026-10-16T07:20:29","slug":"the-velocity-strength-filter-274-mdd","status":"publish","type":"post","link":"https:\/\/avalonquant.com\/blog\/2026\/08\/the-velocity-strength-filter-274-mdd.html","title":{"rendered":"The Velocity Strength Filter: -27.5% MDD Before 17.6% CAGR | High Risk"},"content":{"rendered":"

Welcome to Avalon QuantBrief, where we dissect high-performance systematic trading strategies to uncover their true risk-return profiles. Today, we analyze the famous Velocity Strength Filter, a momentum-driven strategy boasting a 17.6 percent CAGR but carrying a significant 27.5 percent maximum drawdown. We will break down its mechanics, explore our optimized modifications, and evaluate whether its high-risk profile is suitable for your portfolio.<\/p>\n\n

\nBacktest Summary (2017\u2013present)<\/strong>

\n\ud83d\udcc8 CAGR: 17.6%<\/strong>
\n\ud83d\udcc9 Max Drawdown: -27.5%<\/strong>
\n\u26a1 Sharpe Ratio: 0.84<\/strong>
\n\ud83d\udcb0 Total Return: 402.9%<\/strong>
\n\ud83c\udfaf Universe: US leveraged index ETFs, defensive assets and cash-like funds<\/strong>\n<\/div>\n

High Risk: Return Versus Risk<\/h2>\"scene\"

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.<\/p><\/div>

Mechanics of the Velocity Strength Filter<\/h2>\"scene\"

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.<\/p><\/div>

Optimizing the Momentum Engine<\/h2>\"scene\"

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.<\/p><\/div>

Verified Backtest Results<\/h2>\"scene\"

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.<\/p><\/div>

Profit And Loss Regimes<\/h2>\"scene\"

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.<\/p><\/div>

Verdict: High Risk<\/h2>\"scene\"

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.<\/p><\/div>\n

\u26a0\ufe0f Not financial advice. This is for educational purposes only. Always do your own research before investing.<\/em><\/p>\n\n

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