What it is
The Ulcer Index was developed by Peter Martin in 1987. Unlike most volatility tools it only counts the downside: how far price has fallen from its recent highest close, and for how long. A market that rises steadily scores near zero even if it moves fast.
It sits in its own pane and is read against its own history. There is no fixed good or bad level, because the number depends on the market and the timeframe.
How it is calculated
1. For each candle, find the highest close of the last 14 candles. 2. Work out how far the current close is below that high, as a percentage. If the close is the high, the drop is zero. 3. Square each of those percentage drops, so deep drops count much more than shallow ones. 4. Average the squared drops over the last 14 candles. 5. Take the square root. The result is the Ulcer Index, in percent.
Settings
| Setting | Default | Range | What it changes |
|---|---|---|---|
| length | 14 | 2 to 200 | How many candles it looks back for the high and the average. Longer smooths it and covers longer pullbacks. |
How to read it
How to trade it
- 1
Use it to qualify buy-the-dip trades in an uptrend: only buy pullbacks while the Ulcer Index is below its own average.
- 2
Entry trigger: in an uptrend on gold 4 hour, price pulls back to a moving average and the Ulcer Index turns down from a small rise. Buy on a bullish close.
- 3
Stop: below the pullback low, for example 15 to 25 points on gold 4 hour.
- 4
Target: the previous high first, then 2 times the stop.
- 5
If the Ulcer Index jumps well above its average, stop buying dips until it settles.
The dip buying idea is cancelled if the Ulcer Index keeps rising and price closes below the pullback low.
WickSpeak draws it on the chart and writes a plain-English reading on the live candle: what it is, what it is doing now, how to trade it and what would prove it wrong. Playbook can test it as a condition in a play: is above its own average, is below its own average, is rising and is falling.
Best markets and timeframes
Best on 1 hour to daily charts of trending markets such as gold and stock indices like US30 and NAS100, where pullback depth matters. It is less useful on very short timeframes.
Common mistakes
- Comparing the raw number between markets; read it against the same market's history.
- Using it to time exact entries. It describes risk, not turning points.
- Ignoring that it only measures falls, so it says nothing about the risk on a short.
Works well with
Questions traders ask
What does a high Ulcer Index mean?
It means price has recently fallen a long way from its high or stayed below it for a long time. That signals stress in the trend and higher downside risk.
How is the Ulcer Index different from standard deviation?
Standard deviation counts moves up and down equally. The Ulcer Index only counts drops from the recent high, so a fast steady rise scores low.
What is a good Ulcer Index value?
There is no universal value. Compare it with its own recent average on the same market and timeframe; below average means calmer than normal.
Can the Ulcer Index be used for shorts?
It is built for long side risk because it measures drops from highs. For short trades, watch rallies with ATR or standard deviation instead.