Ulcer IndexUI
The Ulcer Index measures downside risk by looking at how deep and how long prices stay below their recent high. It squares the percentage drawdowns, averages them and takes the square root, so long, deep declines score far higher than brief dips.
Standard deviation treats a surge in price as risk, which no investor actually minds. The Ulcer Index looks only at what hurts: falling below a previous high and staying there. Its name comes from the stress those drawdowns cause. This entry explains how it is calculated, how to read it and how it compares with standard deviation.
- Category
- Risk Management
- Reading time
- 3 min
- Also called
- Ulcer Index indicator, Martin ratio input
- Updated
The Ulcer Index in plain words
Developed by Peter Martin and Byron McCann in 1987, the Ulcer Index is a volatility indicator focused on downside risk.1
It is the square root of the average of squared percentage drawdowns from the recent high, so deeper and longer drawdowns raise it.1
Standard deviation, by contrast, measures dispersion around an average in both directions.2
How the Ulcer Index is calculated, step by step
Choose a period
14 periods is the default.
Track the highest close
Over the look-back window.
Percentage drawdown
(Close − highest close) ÷ highest close × 100. See Drawdown.
Square each drawdown
Big drops weigh much more.
Average the squares
Over the period.
Take the square root
The result is the Ulcer Index.
Worked examples
Example 1 — No drawdowns
UI = 0A fund closes higher every day for 14 days.
| Drawdowns | All 0% |
| Ulcer Index | 0 |
The index is zero when prices close higher every period.1
Example 2 — Simple calculation
UI ≈ 2.45Four periods with drawdowns of 0%, −2%, −4%, −2%.
| Squares | 0 + 4 + 16 + 4 = 24 |
| Average | 24 ÷ 4 = 6 |
| Ulcer Index | √6 ≈ 2.45 |
Technically it is the square root of the mean of squared percentage drawdowns.1
Example 3 — Depth matters
Equal risk scoresFund A has four −3% drawdowns; fund B has three 0% periods and one −6%.
| Fund A | √((9 × 4) ÷ 4) = 3 |
| Fund B | √(36 ÷ 4) = 3 |
Squaring penalises large drawdowns more: one −6% dip counts as much as four −3% ones.1
Ulcer Index vs standard deviation
| Aspect | Ulcer Index | Standard deviation |
|---|---|---|
| Counts | Only declines from highs | All swings |
| Duration | Long drawdowns score higher | Ignored |
| Upside moves | Not penalised | Penalised |
| See also | Martin ratio | Standard Deviation |
How investors use the Ulcer Index
Comparing funds
Choosing lower drawdown risk. See Mutual Fund.
Risk-adjusted returns
Dividing excess return by UI gives the Martin ratio. See Sharpe Ratio.
Strategy evaluation
Checking how painful a backtest's declines were. See Backtesting.
Weekly analysis
Martin notes it works well with weekly data.1
Advantages and disadvantages
Advantages
- Focuses on real downside pain.
- Captures both depth and duration.
- Not distorted by upside swings.
Disadvantages
- Less familiar than standard deviation.
- Depends on the look-back period.
- Says nothing about upside potential.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why it was created
Beginner
Mutual funds aim to grow in value, so the main risk investors feel is the drawdown; the Ulcer Index measures how much of that they may have to stomach.1
Default setting
Intermediate
With the default 14 periods, the Ulcer Index reflects the expected percentage drawdown over that window.1
Superior to standard deviation?
Advanced
Many consider it a better risk measure than standard deviation because it ignores upside volatility.1 It still uses only past data. See Drawdown Duration.
Common mistakes
Comparing different periods
Use the same look-back for every fund.
Ignoring returns
Low risk with low return may not help.
Using too little data
Short windows miss bigger drawdowns.
Reading it as a forecast
It describes past drawdowns.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- The Ulcer Index measures downside risk only.
- It uses percentage drawdowns from the recent high.
- Squaring makes deep drawdowns count more.
- Longer drawdowns raise it too.
- It is often used to compare funds.
Frequently asked questions
What is a good Ulcer Index?
Why is it called the Ulcer Index?
What is the Martin ratio?
Further learning
- Drawdown
What the index measures.
- Standard Deviation
The two-sided alternative.
- Sortino Ratio
Another downside-focused measure.
- Calmar Ratio
Return relative to drawdown.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- StockCharts ChartSchool. Ulcer Index (opens in a new tab) Checked .
- StockCharts ChartSchool. Standard Deviation (Volatility) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.