Ulcer index

The ulcer index is a stock market risk measure or technical analysis indicator devised by Peter Martin in 1987, and published by him and Byron McCann in their 1989 book The Investors Guide to Fidelity Funds. It is a measure of downwards volatility, the amount of drawdown or retracement over a period. Other volatility measures like standard deviation treat up and down movement equally, but most market traders are long and so welcome upward movement in prices, it is the downside that causes stress and the stomach ulcers that the index's name suggests. (The name pre dates the discovery that most gastric ulcers are caused by a bacterium rather than stress.) The term ulcer index has also been used (later) by Steve Shellans, editor and publisher of MoniResearch Newsletter for a different calculation, also based on the ulcer causing potential of drawdowns. Shellans' index is not described in this article.

The index is based on a given past period of N days. Working from oldest to newest a highest price (highest closing price) seen so far is maintained, and any close below that is a retracement, expressed as a percentage

For example, if the high so far is $5.00 then a price of $4.50 is a retracement of −10%. The first R is always 0, there being no drawdown from a single price. The quadratic mean (or root mean square) of these values is taken, similar to a standard deviation calculation. The squares mean it does not matter if the R values are expressed as positives or negatives, both come out as a positive Ulcer Index. The calculation is relatively immune to the sampling rate used. It gives similar results when calculated on weekly prices as it does on daily prices. Martin advises against sampling less often than weekly though, since for instance with quarterly prices a fall and recovery could take place entirely within such a period and thereby not appear in the index.