116 Ulcer Index

UI measures downside risk in terms of both the depth and duration of price declines. The index increases in value as the price moves farther away from a recent high and falls as the price rises to new highs. The indicator is usually calculated over a given period, with the Ulcer Index showing the percentage drawdown a trader can expect from the high over that period.

Calculated as:

Percentage 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

Figure 12.22: Ulcer Index