Layer 2 — the lab

Backtests

This is where the rules get tested against history before they touch money.

Status

The Layer 2 engine is built and running — a clean rewrite after the first backtester turned up bugs (shared trade objects getting costed twice, a Darvas box that let the breakout day define itself, dropped volume data). Seventeen unit tests prove the mechanics before any number below gets quoted. Options prices are Black-Scholes estimates with constant volatility, labeled as estimates everywhere.

Current rankings — 20 tickers × 10 years, ranked after the fact

Costs modeled ($2.60 commission + $5.00 slippage per trade), 5-position cap enforced, no lookahead. Every trade ranked best → worst by realized P&L.

Failed rally → bear call spread (risk-off only)

114 trades · profit factor 0.84 · expectancy −$8.16/contract. Rejected. An earlier 28-trade sample looked profitable — the larger sample says it was noise. The regime gate still filters worse trades, but it filters losers into smaller losers, not winners.

Darvas breakout → bull call spread

445 trades · profit factor 1.09 · expectancy +$9.82 ± $10.30. Rejected. Statistically zero, with a $46k max drawdown against $4.4k total profit. The spread clips the fat right tail that makes momentum work — which is why the stock version exists.

Darvas breakout → stock (relative-strength filter, ATR trailing stop)

239 trades · profit factor 2.16 · expectancy +$264.74. Promising but unproven. Three caveats before it earns trust: the 20-ticker universe is hand-picked large-cap winners (selection bias), stops are modeled with no gap slippage, and the max drawdown ran $54.6k against $63.3k total profit. Next: re-run on a neutral universe with gap modeling.

Phil Town Rule #1 → stock at 50% margin of safety

4 signals in 5 years — untestable with available data. Free fundamentals aren't point-in-time (filing dates unknown), so no honest historical backtest exists. This one gets scored live, forward, in the prediction ledger — or not at all.

The bar to clear

Before any setup graduates to paper trading: profit factor above 1.5, across 100+ historical trades per setup. Anything less stays in the lab. Right now, everything is in the lab.

Full engine audit with the unit tests and the retraction of the earlier v1 numbers lives in the repo at engine/ENGINE-AUDIT.md. Losing results stay published — a lab that only shows winners is marketing, not research.

Nikkhah Capital — a private trading practice. Nothing here is financial advice.