COT Index is the Stochastic of the last (x) Net Position values. It lets us see HOW bullish / bearish the entities in question are compared to the last (x) years.
Calculation: 100*(Current Net - Min Net (x)) / (Max Net (x)) - (Min Net(x))
In case of Gold, means that compared to the last 3 years (x), Commercial entities are 88% bullish. In other words, they have not reached their most bullish stance.
On the other hand, Willco calculates with NP & OI. Open Interest (OI) is the interest in the current market to put it plainly. The indicator lets us peek into how much (in %) are Commercial entities own of the OI based on their NP relative to the last x years.
Calculation: Stochastic (NP / OI, vara [weeks])
Since futures are a zero-sum game, (unlike Equities) for every buyer, there has to be a seller. OI increase ONLY when a long is offset by a short or vica versa. Since Commercials are the single most powerful entities in the game, is it useful to monitor how much they hold of the OI (all contracts)? Oh yeah.
To summarize, both indicators are calculated using the Stochastic formula. They answer the HOW MUCH question.
COT Index: How bullish/bearish Commercials / Funds are relative to the last X years?
Willco: How much of the OI Hedgers own relative to the last X years?
I can’t really answer the advantages/disadvantages question since it’s quite subjective. It depends on the current market condition. The Index & Willco serves as a guide for me, showing me the time to be prepared for a correction / continuation / breakout / etc. But I don’t want to leave you hanging, so the weakness of the COT Index is that it usually flashing premature sell (buy) signals in an extended bullish (bearish) trend.
Question #3. I don’t necessarily trade them all for the reasons explained above. Although COT Index extreme is an entry criteria for me. But once again, I sold Silver for the LACK of extreme reading at a major support zone.
I guess that is why ppl say that trading is an art rather than science.