Measuring the Market with Commercial Net Positioning Data
Let's make a start on this brief survey with the contributions of Williams (2005). We'll then see how the MIDAS tools can slot in alongside them.
The COT Report Indicators of Larry Williams
While discussing Williams's views on total open interest earlier, we saw that one of his indicators is the COT Index, based on George Lane's stochastic with a lookback period of either one or three years. Williams also applies it to the net positioning data. The key to this indicator is the normalized market extremes it produces at the 80/20 levels. Because the commercials are negative-feedback traders, the extreme stochastic readings must be interpreted inversely to how they're normally read, that ...