I've included a table showing the trades for the last 20 years. The trades assume we only enter trades when the expected return is over 4% and the trades are closed when the expected future returns fall below 4%. If you remember from the previous post that expected returns are:
((Target Price / Entry Price)^ (1/10))-1
So when the price is equal to the target price the expected future returns will equal zero. If you use 4% as your minimum annual return (below this there will be many opportunities elsewhere to invest) then the maximum entry price will be about 68% of the target price. It depends on your preferences of course, you might want to be less strict if you were wanting more commodities exposure to diversify your portfolio.
The chart below illustrates this on a coffee trade:
Point A is your entry point as the price breaks it's 100 day high. B is the target used in our expected returns calculation. C is the exit point based on a price of 68% of the purple target line. At this level the future expected return is less than 4% so we close the trade and look for better opportunities elsewhere.
In practice you probably wouldn't enter a trade without an expected return above 5.5% or 6% and certainly at least a few percentage points above where you would exit to prevent quick in-out trades. Essentially there needs to be enough of a return to make it worth the effort.
As you can see there weren't that many trades. 31 in the last 20 years. Admittedly the returns have been very good with the average trade lasting about 1 year and returning over 25% per year on average. The only losing trade was a long term trade in Coffee that failed to gain any momentum. After three years it was closed out at a small loss as the long term moving average turned down and cut it off.
As you would expect the higher the expected return on entry the higher the realised return would be:
Next time we will look at the current commodities markets and see what opportunities there are at present.
See also: Part 1, Part 3