Ulcer Index - UI

Definition of 'Ulcer Index - UI'


A technical indicator that measures downside risk, in terms of both depth and duration of price declines. The Ulcer Index (UI) increases in value as the price moves farther away from a recent high, and falls as the price rises to new highs. The indicator is usually calculated over 14 days, with the UI showing the percentage drawdown a trader can expect from the high over that period.

The greater the value of the UI, the longer it takes for a stock to get back to the former high.

The indicator is calculated in three steps:

  1. Percentage Drawdown = [(Close - 14-period High Close)/14-period High Close] x 100
  2. Squared Average = (14-period Sum of Percentage Drawdown Squared)/14 
  3. Ulcer Index = Square Root of Squared Average
 

Investopedia explains 'Ulcer Index - UI'


Developed by Peter Marin and Byron McCann in 1987 for analyzing mutual funds, the indicator only looks at downside risk, not overall volatility like standard deviation.

Which price high is used in the UI calculation is determined by adjusting the look back period. A 14-day Ulcer Index measures declines off the highest point in the last 14 days. A 50-day Ulcer index measures declines off the 50-day high. A longer lookback period provides investors with a more accurate representation of the longer term price declines they may face. A shorter-term lookback period provides traders a gauge of recent volatility.

Use the Ulcer Index to compare different investment options. A lower average UI means lower drawdown risk compared to an investment with a higher average UI. Applying a moving average to the UI will show which stocks and funds have lower volatility overall.

Watching for spikes in UI which are beyond "normal" can also be used to indicate times of excessive downside risk, which investors may wish to avoid by exiting long positions.

Apple chart screen shot

Source: Stockcharts.com



comments powered by Disqus
Hot Definitions
  1. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  2. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  3. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  4. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
  5. Retail Sales

    An aggregated measure of the sales of retail goods over a stated time period, typically based on a data sampling that is extrapolated to model an entire country. In the U.S., the retail sales report is a monthly economic indicator compiled and released by the Census Bureau and the Department of Commerce.
  6. Okun's Law

    The relationship between an economy's unemployment rate and its gross national product (GNP). Twentieth-century economist Arthur Okun developed this idea, which states that when unemployment falls by 1%, GNP rises by 3%. However, the law only holds true for the U.S.
Trading Center