Ulcer Index — What Is It?
Last Updated on January 20, 2023
Risk management is an essential aspect of trading. One of the most valuable indicators for assessing risks is the Ulcer Index. What is the index, and what does it tell you?
The Ulcer Index (UI) is a volatility indicator that measures downside risk in terms of both the depth and duration of price declines. It considers the highest closing price over a given period, typically 14 days, and shows the percentage drawdown a trader can expect from the high over that period.
What is the ulcer index?
The Ulcer Index (UI) is a volatility indicator that measures downside risk in terms of both the depth and duration of price declines. It considers the highest closing price over a given period, typically 14 days, and shows the percentage drawdown a trader can expect from the high over that period. Thus, it increases in value as the price moves farther away from a recent high and falls as the price rises to new highs. Also, the greater the value of the index, the longer it takes for a stock to return to the former high.
The Ulcer Index is a volatility indicator that helps traders and analysts determine risks while trading. However, the index measures volatility only on the downside. First introduced in 1989, the index was designed for assessing mutual funds, which is why the index is primarily based on downside risk — the potential of a security to decline in value due to changing market conditions.
Since mutual funds are created to make money for the investors by only going up in value, the only risks that they face are the downside. The indicator was named Ulcer Index to give investors a clear view of the downside risks to know if they could “stomach” the investment. Many consider the index superior to other ways of calculating risk, such as standard deviation.
What is the Ulcer Index formula?
The indicator involves a 3step calculation, and the formulae for the three steps are given as follows:
Step 1: Getting the Percentage Drawdown
Percentage Drawdown = [(Close – 14period Highest Close)/14period Highest Close] x 100
Step 2: Getting the Squared Average
Squared Average = (14period Sum of Squared Percentage Drawdown)/14
Step 3: Getting the Ulcer Index
Ulcer Index = Square Root of Squared Average
Note that the price high used in the Ulcer Index calculation is determined by adjusting the lookback period. Thus, a 14day Ulcer Index measures the decline from the highest close in the past 14 days, while a 50day Ulcer Index measures the decline from the 50day highest close. A longer lookback period offers a more accurate representation of the longterm price declines they may face. Conversely, a shorterterm lookback period shows potential shortterm volatility.
Who invented the ulcer index?
The Ulcer Index was developed by Peter Martin and Byron McCann for analyzing mutual funds. The indicator was created in 1987, but Martin and McCann first published it in their 1989 book, The Investor’s Guide to Fidelity Funds.
The indicator was designed to measure only the downside risk, not the overall volatility that other volatility indicators, such as the standard deviation measure. Martin’s and McCann’s intention was to create a way to measure the downside risk, which causes stress and stomach ulcers, as the index’s name suggests.
Risk metrics and trading system performance:
We have written many other relevant articles about different formulas and risk calculations in trading:
 Win ratio in trading – what it is and why it is important (winning ratio)
 Trading strategy and system performance metrics (What is it and how to use it)

What Is A Good Equity Curve? – Profit & Loss Curves Best Practices
 The Sharpe Ratio Explained (What is a good Sharpe Ratio? Examples)
 The profit factor explained (what is a good profit factor in trading? Examples of profit factors)
 What is KRatio?
 Treynor Ratio, how to calculate it: What is it and what is good?
 Jensen Ratio – what is it and how is it calculated? (Jensen’s Performance Index)
 Sortino Ratio – what is it and how do you use it?
 What is Monte Carlo simulation in trading and investing? (Measure luck and uncertainty)
Ulcer Index video
We made an Ulcer Index video (please follow our YouTube channel – we are constantly improving our videos).
What does the Ulcer Index tell you?
Here is what the inventor had to say about the Ulcer Index:
Ulcer Index measures the depth and duration of percentage drawdowns in price from earlier highs. The greater a drawdown in value, and the longer it takes to recover to earlier highs, the higher the UI. Technically, it is the square root of the mean of the squared percentage drawdowns in value. The squaring effect penalizes large drawdowns proportionately more than small drawdowns.
Most analysts recommend using the index as a measure of risk in any situation where the standard deviation (SD) can be used. As a statistical measure, you can compare the Ulcer Index values of different assets to determine relative risk, and the index tends to work well with weekly data.
You can also chart the Ulcer Index over time and use it as a kind of technical analysis indicator to show stocks that are going into an ulcerforming territory. The value you designate as your ulcerforming territory is up to you.