An indicator developed by Peter G. Martin and Byron B. McCann that is used to measure the riskiness of investments such as securities, commodities, indexes, or mutual funds. It is created by factoring in the depth and duration of drawdowns from recent peaks. A large UI value indicates that the security represents undue risk and an investor who holds it will likely need to wait longer for the investment’s price to climb back to recent highs.
Based on closing prices, the Ulcer Index measures volatility based on price depreciation from its high over a specific look-back period. The index is zero if prices close higher each period. This means there is no downside risk because prices are steadily rising. Prices, of course, do not steadily rise, so there will be declines along the way. Using a default setting of 14 periods, the Ulcer Index reflects the expected percentage drawdown over this period. The table shows a sample calculation for 14-periods.
Percent-Drawdown = ((Close - 14-period Max Close)/14-period Max Close) x 100
Squared Average = (14-period Sum of Percent-Drawdown Squared)/14
Ulcer Index = Square Root of Squared Average