Peter Martin and Byron McCann developed the Ulcer Index Indicator in 1987. This Ulcer Index is a volatility indicator that measures downside risk. This indicator was first introduced in 1989 in Investor’s Guide to Fidelity Funds. Basically, the index designed with mutual funds in mind. This is why it only focuses on downside risk.
What is the Ulcer Index Indicator?
The Ulcer Index attempts to estimate the “stress” of holding an investment by estimating price retracements. The indicator is based on the notion that downward volatility is bad, but upward volatility is quite good. It increases in value as the price moves farther away from a recent high price. And also falls as the price rises to new highs. The indicator is basically calculated over a 14-day period along with the Ulcer Index.
How to Calculate the Ulcer Index?
The indicator is all about calculating the level of risk by estimating how far a stock price has fallen from current highs.
The Ulcer Index can be calculated in the three-step process.
Drawdown Percentage = ((Close – Highest Close over 14-periods)/Highest Close over 14-periods)
Squared Average = (14-period Sum of Percentage Drawdown Squared)/14
Ulcer Index = Square Root of Squared Average
How to Use of the Ulcer Index Indicator on Charts?
If you want to get more details regarding the Ulcer Index indicator, kindly open the STUDIES section of Zerodha Kite. This indicator is also available in Kite mobile App. The Period is 14 and the Field is Close. If you want to change the value then change it high and low. You can also change the Field. The traders can also check the attaching process of the Ulcer Index indicator to Reliance Industries share price chart. And, this indicator works well on daily, weekly, monthly or intraday charts.
The next charting platform is Upstox Pro. Here, I added the UI indicator from the charting window, indicator section. There I type down the name of the indicator and after customization, I click on Apply.
More Information about the Indicator
So, the indicator is a technical indicator that measures downside risk, in terms of both the depth and duration of price declines. Moreover, this indicator increases the value as the price moves further away from a recent high and falls as the price rises to new highs. The indicator is usually calculated over a 14-day period. In this, with the Ulcer Index percentage drawdown, a trader can expect from the high over that period.
- The developer Peter Martin recommends the indicator as a measure of risk in various contexts where the standard deviation is usually used.
- Traders can also chart this indicator over time and use it as a kind of technical analysis indicator.
- Ulcer Index indicator shows ulcer-forming territory or to compare volatility in different stocks.
- The traders can use the indicator to compare different investment options.
How to Use the Ulcer Index Indicator Professionally for Profitable Trade?
- A lower average of this indicator means lower drawdown risk compared with an investment with a higher average Ulcer Index (UI).
- Ulcer Index is a very good indicator to recognize periods with a high possibility of the market turning into a recession which is a long-rem downtrend.
- A simple trading system based on this indicator for long-term bullish traders would be staying in cash when Ulcer Index rises above 5% n the 10-year charts which are calculated 1 bar equal to 10 days.
- Moreover, it defines long-term bullish traders may definitely use Ulcer index as one of the signals to see long-term bullish positions.
However, the indicator mainly measures risk by focusing on drawdowns represented by price declines. This indicator is best for long-only investors or traders. The index indicator hovers near zero when prices regularly record higher highs and advance. The indicator rises when prices move lower and extend from their recent high. This indicator can just measure the downside risk that traders can use to compute risk-adjusted returns. In addition, it mainly measures the human stress of holding a stock. This is a volatility measure that only captures continuous downside movements in share price, and ignores upside volatility.