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 was designed with mutual funds in mind. This is why it only focuses on downside risk. The only risk is the drawdown or downside. The Ulcer Index indicator measures the drawdown. The Ulcer Index is superior to the standard deviation and other measures of risk.
Usage of the Ulcer Index Indicator :
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. This indicator works well on daily, weekly, monthly or intraday charts.
The indicator is a technical indicator that measures downside risk, in terms of both the depth and duration of price declines. 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.
Calculation Of The Ulcer Index :
The calculation of the indicator of three steps :
- The first step is calculate the Percentage Drawdown = [(Close – 14-period High Close)/14-period High Close] x 100.
- The middle step is to calculate the Squared Average = (14-period Sum of Percentage Drawdown Squared)/14.
- The last step is to calculate the Ulcer Index = Square Root of Squared Average.
Traders can determine the price high in the indicator calculation by adjusting the look-back period. A 14-day indicator measures decline off the highest point in the past 14 days. Another part, A 50-day indicator measure declines off the 50-day high. In this indicator, a longer look-back period provides investors with a more accurate representation of the long-term price declines. A shorter-term look-back period of Ulcer Index indicator provides traders a gauge of recent volatility.
Using The Ulcer Index Indicator :
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 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. A lower average of this indicator means lower drawdown risk compared with an investment with a higher average Ulcer Index (UI). In this application, a moving average to the Ulcer Index will show. Stocks and funds have lower volatility here. Watching for spikes in the indicator that are beyond “normal” can also be used to indicate times of excessive downside risk. Traders tend to avoid it by exiting long positions.
In technical analysis, traders can use the indicator as a statistical measurement to determine the relative risk of a security. Just like other volatility indicators, 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. In 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 is calculate 1 bar equal to 10 days. It defines long-term bullish traders may definitely use Ulcer index as one of the signals to see long-term bullish positions.
The indicator mainly measures risk by focusing on drawdowns represented by price declines. This indicator is best suited 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. 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.