What Does Ulceration Index Mean?
The Ulcer Index (UI) is a technical indicator that measures downside risk in terms of both the understanding and duration of price declines. The index increases in value as the price moves farther away from a recent great in extent and falls as the price rises to new highs. The indicator is usually calculated over a 14-day period, with the Ulcer Clue showing the percentage drawdown a trader can expect from the high over that period.
The greater the value of the Plague Index, the longer it takes for a stock to get back to the former high. Simply stated, it is designed as one measure of volatility solely on the downside.
Understanding Ulcer Index (UI)
The Ulcer Index was developed by Peter Marin and Byron McCann in 1987 for analyzing common funds. Marin and McCann first published it in their 1989 book, The Investor’s Guide to Fidelity Funds. The blame for looks only at downside risk, not overall volatility.
Calculating the Ulcer Index
The indicator is calculated in three moves:
- Percentage Drawdown = [(Close – 14-period High Close)/14-period High Close] x 100
- Squared Common = (14-period Sum of Percentage Drawdown Squared)/14
- Ulcer Index = Square Root of Squared Average
Which payment high is used in the Ulcer Index calculation is determined by adjusting the look-back period. A 14-day Ulcer Index weights declines off of the highest point in the past 14 days. A 50-day Ulcer Index measures declines off of the 50-day lavish. A longer look-back period provides investors with a more accurate representation of the long-term price declines they may intimidate. A shorter-term look-back period provides traders with a gauge of recent volatility.
Using the Ulcer Index
Martin interests the Ulcer Index as a measure of risk in various contexts where the standard deviation is usually used. The Ulcer List can also be charted over time and used as a kind of technical analysis indicator, to show stocks going into ulcer-forming sector, or to compare volatility in different stocks.
Investors can use the Ulcer Index to compare different investment options. A lower mean Ulcer Index means lower drawdown risk compared with an investment with a higher average UI. Put to using a moving average to the Ulcer Index will show which stocks and funds have lower volatility comprehensive.
Watching for spikes in the Ulcer Index that are beyond “normal” can also be used to indicate times of excessive downside risk, which investors may whim to avoid by exiting long positions.
Source: Stockcharts.com