Ulcer index

Ulcer index or UI is a popular indicator which shows the riskiness of an investment. The indicator was developed by Peter G. Martin and Byron B. McCann and was published in 1989 in the book “The Investors Guide to Fidelity Funds”. Ulcer index is mainly used by traders to measure short-term risk associated with an instrument; stock, index, funds or commodities.
Ulcer index differs from standard deviation and from other risk indicators in considering only the downside volatility. The idea is that, from a trader point of view only the downside risk is to be considered; as upside volatility usually favors the stock holder. Ulcer value for an investment is calculated by the formula
Where R is the percentage drop of closing prices calculated asR = 100 x (Price –highest price)/ highest price.
High values of ulcer index shows high risk associated with an instrument and if the instrument drops in price, it can take a long time to recover. Thus these kinds of instruments are not suitable for traders looking for short-term profits or who are trading on risk-capital. Most traders use 14-day ulcer index for technical analysis. Traders can also set a safe ulcer level (eg: at 5) for screening stocks, and can use the index for comparing two or more related stocks (same industry or section) and to trade the most suited ones. Remember ulcer level does not consider any upward movements and it drops with it