Ulcer Index indicator for long-term investors. Is it just a forgotten tool from the 1980s?

A technical tool known as the Ulcer Index indicator was designed by Peter Martin and Byron McCann in the late 80s. It measures volatility by focusing on downside risk.

The Ulcer Index indicator

The Ulcer Index indicator is, of course, available for IQ Option traders. It can be found in the “Other” group of indicators.

Once you add the Ulcer Index to the chart, you will see that its default setting is 14 periods. So it takes 14 past days to its calculations. It compares whether the closing prices are higher or lower. In the case of higher closing prices, the index is zero because there is no downside risk.

The value of the indicator will rise when the downside risk grows and the price cannot recover to the previous highs. The index will fall in value when the price creates new highs.

The Ulcer Index focuses only on the downside movements and these are the most stressful for traders. They may cause stomach ulcers, thus the name of this tool.

How to calculate the Ulcer Index indicator?

The Ulcer Index is measured by the Square Root of Squared Average. A Squared Average is 14 period Sum of Percentage Drawdown Squared divided by 14. And Percentage Drawdown is calculated by dividing the difference between the Close and 14-period High Close by 14 period High Close and then multiplying it by 100.

Usage of the Ulcer Index

The Ulcer Index is an indicator used primarily by long-term investors. Using it at low intervals is not popular. We also recommend using this indicator on daily charts and higher.

It should also be clearly noted that it is not a technical analysis indicator that generates trading signals. Its role is limited only to the multidimensional analysis of a given asset. You can't use it alone to create an Ulcer Index strategy. Thus, it is a complement to the information provided by other tools.

Within the framework of the analysis with the Ulcer Index, it is worth paying attention to two elements. The indicator reaches its local maximums most often when the price chart reaches the bottom.

The second valuable regularity is that the market rises when the UI falls and vice versa. This fact alone can be used to decide whether to exit an open position. It is also worth looking at the peaks on the Ulcer Index. If the average peaks on the indicator are broken it is likely that the price will continue to fall.

Pros and Cons of the Ulcer Index Indicator 🎯

Summary

The indicator we have described today is a good choice for long-term investors. It measures the downside risk. Its calculations are near zero when the price form higher highs. When the price decreases, the Ulcer Index grows.

This is not the type of indicator to use separately in order to obtain trading signals. Use it to measure downside risk and risk-adjusted returns at the same time.

The inventors of the Ulcer Index propose to use it on the daily and weekly price charts.

The Ulcer Index is the volatility indicator. Observing it may provide information about excessive downside risk, and the investors may want to exit long positions to avoid losing when the price falls.

Go to the IQ Option demo account to check what you can read from the Ulcer Index indicator. This account is offered for free for IQ Option users. Furthermore, it is supplied with virtual cash that can be replenished any time you need more funds to trade.

Have fun and good luck!

Q&A on Ulcer Index Indicator 💡