The Commodity Selection Index (CSI)
What is it?
The Commodity Selection Index (CSI) is a momentum indicator developed by J. Welles Wilder, Jr., and was published in his book New Concepts in Technical Trading Systems in 1978. The CSI takes trend strength and volatility into account to determine momentum. It was developed specifically for short-term trading of commodity futures contracts that are likely have big moves in price and a potentially large ROI. It accomplished this by using the Directional Movement Index (DMI) (or the ADXR component of the DMI, to be more precise) to determine trend strength, the Volatility Index and Average True Range (ATR) to determine volatility, margin requirements relative to the DMI and volatility, and the reasonable commission rates of the futures contracts.
How is it calculated?
The CSI is calculated by multiplying the ATR, a constant and the ADXR. The latter is the sum of the recent ADX plus the ADX of 14 periods ago divided by two. The formula for the CSI is:
CSI = ( ADXR x ATR14 ) x ( ( V / √M ) x ( 1 / ( 150 + C ) ) ) x 100
where V is the value of a 1c move in the commodity; M is the margin requirement in USD for trading the commodity contract, and C is the brokerage or commission in USD.
How is it used?
The CSI is used as a filter to identify commodities that could be traded with a high ROI in the short term. A commodity with a high CSI value relative to other commodities indicates that the underlying commodity is in a strong trend, with a high volatility, and relatively low margin an commission rates.
Trading equities, options, derivatives, currencies, commodities or any other financial security can offer significant returns BUT can also result in significant losses if the market moves against your position. It requires a strong commitment to skill development, knowledge acquisition, and emotional control. It should be treated as a business with a clear business plan, a risk analysis, and set of attainable goals. The risk associated with trading the vagaries of the stock markets is probably the most important consideration as it has a profound effect on emotional control. You should not trade the stock markets with money you cannot afford to lose as there is considerable exposure to risk in any stock market transaction.
Furthermore, the past success of any trading method, strategy, or system is only indicative of future success. Under no circumstances should past success be construed as a guarantee of future success!