What is a 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 is in 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 associated risks as it indicates strong trending, but reversals are always possible.

BREAKING DOWN Commodity Selection Index (CSI)

The Commodity Selection Index (CSI) is a tool mostly used in 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 amount of risk taken and make it easier to trade by incorporating trend characteristics. Some traders will only trade the commodity with the highest CSI value, while others will make transaction signals when they see a sharp increase in the index.

Types of Indicators

Indicators refer to statistics which 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 which 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 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 who have a holding period of a year or less. Short-term trading can be very 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 at 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 to be already able to act to benefit from the market reaction preemptively.