DEFINITION of 'Ulcer Index - UI'

Ulcer Index is 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 a 14-day period, with the Ulcer Index showing the percentage drawdown a trader can expect from the high over that period.

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

BREAKING DOWN 'Ulcer Index - UI'

The Ulcer Index was developed by Peter Marin and Byron McCann in 1987 for analyzing mutual funds. Marin and McCann first published it in their 1989 book “The Investors Guide to Fidelity Funds.” The indicator only looks at downside risk, not overall volatility. Other volatility measures, like standard deviation, treat up and down movement equally, but a trader typically does not mind upward movement; it is the downside that causes stress and stomach ulcers that the index's name suggests.

Calculating the Ulcer Index

The indicator is calculated in three steps:

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

Which price high is used in the Ulcer Index 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 long-term price declines they may face. A shorter-term lookback period provides traders a gauge of recent volatility.

Using the Ulcer Index

Martin recommends the Ulcer Index as a measure of risk in various contexts where the standard deviation is usually used. The Ulcer Index can also be charted over time and used as a kind of technical analysis indicator, to show stocks going into ulcer-forming territory, or to compare volatility in different stocks

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

Watching for spikes in Ulcer Index 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

RELATED TERMS
  1. Drawdown

    The peak-to-trough decline during a specific record period of ...
  2. Sterling Ratio

    Sterling ratio is a risk-adjusted return measure that uses compounded ...
  3. Lookback Option

    A lookback option allows the holder to exercise an option at ...
  4. Sum Of Squares

    Sum of Squares is a statistical technique used in regression ...
  5. Market Depth

    Market depth is the market's ability to sustain relatively large ...
  6. Square Position

    A square position is a situation where the market risk has been ...
Related Articles
  1. Investing

    How the "Buy the Dip" Mentality in the Stock Market May Fade

    Consider portfolio changes for a sustained stock market drawdown, with the S&P 500 near its record high, stock valuations stretched and economic growth slowing.
  2. Trading

    Square Stock Reaches Technical Decision Point

    Square shares fell sharply over the past week to key support levels that traders will be watching for signs of a breakdown or breakout.
  3. Investing

    What Do Apple and Amazon Have in Common? Massive Drawdowns (AAPL, AMZN)

    You don't get 30% annualized returns without the occasional 50% drawdown.
  4. Investing

    Don't Let Valuations Drive Your Investing Decisions

    Base your investment decisions on data, processes and risk rather than on valuations.
  5. Investing

    Understanding Volatility Measurements

    How do you choose a fund with an optimal risk-reward combination? Here we teach you about standard deviation, beta and more.
  6. Investing

    3 Vanguard Mutual Funds with Long Track Records

    Read about a few Vanguard mutual funds with long track records. Learn about the Vanguard Wellington Fund which began trading in 1929.
  7. Investing

    Square's Stock Is Facing Steeper Declines

    Despite falling by nearly 16% from its highs in 2018, shares of Square are still up by 40% on the year.
  8. Trading

    Using Technical Indicators to Develop Trading Strategies

    There is no perfect investment strategy that will guarantee success, but you can find indicators and strategies that will work best for your position.
  9. Investing

    Gravity MIA After Seven Straight Up Weeks for S&P500

    Three quarters of S&P500 stocks are above their 50-day moving averages. Should investors be worried?
  10. Investing

    The Pros and Cons of Indexes

    Learn about the advantages and disadvantages of stock indexes and passive index funds. Discover how there is an opportunity cost to using index funds.
RELATED FAQS
  1. What's the difference between a drawdown in banking and a drawdown in trading?

    Understand the different meanings of the term ''drawdown'' as it is applied within the contexts of trading and banking. Read Answer >>
  2. Which periods are used most commonly in creating moving average (MA) lines?

    Learn the most commonly selected periods used by traders and market analysts in creating moving averages to overlay as technical ... Read Answer >>
  3. How do 50-day, 100-day and 200-day moving averages differ?

    Whether you are using the 50-day, 100-day or 200-day moving average, the method of calculation and how the moving average ... Read Answer >>
  4. How can you calculate volatility in Excel?

    Historical volatility is a long-term assessment of risk. Here's how to calculate it in Excel. Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center