Ulcer Index -The Basic Concept

The Ulcer Index measures the “stress” of holding a trade or investment by measuring price retracements. The Ulcer Index is based on the notion that downward volatility is bad, but upward volatility is good.

Unlike standard deviation, the financial industry’s benchmark way of measuring the risk of a stock, which equally weights both violent increases to the upside (upside volatility) and violent decreases to the downside (downside volatility), the Ulcer Index takes a more enlightened approach that states that investors only care about the downside risk of a stock, not the upside risk (upside risk is good, it is equivalent to profits. . . if you are long stock, that is).

Other volatility measures like standard deviation treat up and down movement equally, but a trader doesn’t mind upward movement, it’s the downside that causes stress and stomach ulcers that the index’s name suggests. (The name pre-dates the discovery, described in the ulcer article, that most gastric ulcers are actually caused by a bacterium.)

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.[2] Shellans index is not described in this article.