What Is the Commodity Selection Index (CSI)?
The commodity selection index (CSI) is a technical momentum indicator that attempts to identify which commodities are the most suitable for short-term trading. The larger the CSI value, the stronger the trend and volatility characteristics associated with that particular asset.
This indicator should only be used by traders who can handle large amounts of volatility and the associated risks as it indicates strong trending. However, reversals are always possible.
- The commodity selection index (CSI) uses momentum and volatility to help identify securities for short-term trading opportunities.
- Higher values in the CSI better indicate a strong trend in a particular asset or security.
- Short-term traders focus on volatile securities, so the CSI is a common tool among these investors.
- Traders may only trade the commodity with the highest CSI value or when they see a sharp increase in the index.
Understanding the Commodity Selection Index (CSI)
The commodity selection index (CSI) is a tool mostly used for short-term trading. Short-term traders know that the key to making money is movement, which is the reason they mainly focus on highly volatile assets. This index attempts to lessen the risk and make trading easier by incorporating trend characteristics. Some traders will only look at those securities ranking highest on the CSI, while others will make transaction signals only when they observe a large increase in the CSI.
Types of Indicators
Indicators refer to statistics an investor may use to measure current economic conditions. The investor also may use an index such as the CSI to forecast financial or economic trends. Indicators can be further broken down into either economic indicators or technical indicators.
- Economic indicators measure the growth or contraction of the economy, or sectors within the economy, as a whole. In fundamental analysis, economic indicators that quantify, or measure, current economic and industry conditions provide insight into the future profitability potential of public companies.
- Technical indicators, like the CSI, are used extensively in technical analysis to predict stock trends or price patterns in traded assets. Technical indicators are mathematical calculations based on the price, volume, or open interest of a security or contract. As an example, the CSI uses several calculations to arrive at its index number. These calculations, in part, include the directional movement index (DMI) value, volatility index values, and the average true range (ATR) prices.
The Commodity Selection Index and Short-Term Investing
The CSI is specifically used to hedge the risk of short-term investments. The Internal Revenue Service sees short-term investments as those with a holding period of a year or less. Short-term trading can be extremely lucrative, but it can also be risky. A short-term trade can last for as little as a few minutes to as long as several days. Because short-term trading carries both high risk and high reward, traders must understand each trade to be successful.
There are several basic concepts that a trader can master to succeed in short-term trading. A trader must be able to recognize a good trade before the markets react to the trade, meaning the trader should not react but, instead, benefit from the market reaction preemptively. Thus, the CSI is a useful tool for traders by considering market trends.