Ulcer Index (UI)
Index's meaning could be a little more obvious.
The Ulcer Index (UI) is a technical indicator that measures downside risk in terms of both the depth and duration of price declines. The index expansions in value as the price creates some distance from a recent high and falls as the price ascends to new highs. The indicator is generally calculated more than a 14-day period, with the Ulcer Index showing the rate drawdown a trader can anticipate from the high over that period.
The greater the value of the Ulcer Index, the longer it takes for a stock to return to the former high. Just stated, it is planned as one measure of volatility just on the downside.
Understanding Ulcer Index (UI)
The Ulcer Index was developed by Peter Marin and Byron McCann in 1987 for breaking down mutual funds. Marin and McCann originally distributed it in their 1989 book, The Investor's Guide to Fidelity Funds. The indicator takes a gander at downside risk, not overall volatility. Other volatility measures, similar to standard deviation, treat all over movement similarly, yet a trader regularly wouldn't fret up movement; the downside causes stress and stomach ulcers, as the index's name proposes.
Computing the Ulcer Index
The indicator is calculated in three stages:
- Rate 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 utilized in the Ulcer Index calculation is determined by adjusting the think back period. A 14-day Ulcer Index measures declines off of the highest point in the past 14 days. A 50-day Ulcer Index measures declines off of the 50-day high. A longer think back period gives investors a more accurate portrayal of the long-term price declines they might face. A more limited term think back period gives traders a measure of recent volatility.
Utilizing the Ulcer Index
Martin suggests the Ulcer Index as a measure of risk in different settings where the standard deviation is generally utilized. The Ulcer Index can likewise be outlined after some time and utilized as a sort of technical analysis indicator, to show stocks going into ulcer-shaping domain, or to compare volatility in various stocks.
Investors can utilize the Ulcer Index to compare different investment options. A below Ulcer Index means lower drawdown risk compared with an investment with a higher average UI. Applying a moving average to the Ulcer Index will show which stocks and funds have lower volatility overall.
Looking for spikes in the Ulcer Index that are past "typical" can likewise be utilized to show times of extreme downside risk, which investors might wish to keep away from by leaving long positions.
