Definitions
- Investors Need to Have a Strong Stomach
- The Ulcer Index measures downwards trend volatility
- Is The Ulcer Index accurate?
Investors Need to Have a Strong Stomach
Not long ago, we told you here about the Misery Index, and now we want to introduce another unhappy economic indicator: The Ulcer Index.
This index is used to measure the riskiness of a particular investment.
It does so by calculating the duration and depth of drawdowns following peaks.
According to the theory, this index could indicate to an investor that a specific security is risky, and that he might need to wait long for it to bounce back.
The Ulcer Index measures downwards trend volatility
In even simpler terms, this index aim is to measure volatility, but strictly the kind of volatility that accompanies downward trends.
That’s also where the name comes from.
Most traders aren’t all that stressed out about upward trends.
Downside movements though can easily cause anxiety, and ultimately, stomach ulcers.
Is The Ulcer Index accurate?
This interesting index was developed by two guys named Byron B. McCann and Peter G. Martin.
We’re not going to explain the calculations here.
If you like, there’s plenty of information about this index and its possible uses (although, as always, we remind you that not everyone agree that it’s accurate or even helpful).
Some investors also chart the Ulcer Index over time and treat it as a technical analysis indicator.
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