Ulcer Index From Scratch

Hi, traders!
Volatility is one of the most important parameters of the market. The measurement of it play a great role in technical analysis. Thus, it's kinda important to use tools that can tell you a lot about it.

The Ulcer Index (UI) is a technical indicator that measures downside risk in terms of both the depth and duration of price declines. The index increases in value as the price moves farther away from a recent high and falls as the price rises to new highs. The indicator is usually calculated over a 14-day period, with the Ulcer Index showing the percentage drawdown a trader can expect from the high over that period.

The indicator looks only at downside risk, not overall volatility. Other volatility measures, like standard deviation, treat up and down movement equally, but a trader typically does not mind upward movement; it is the downside that causes stress and stomach ulcers, as the index's name suggests.

The Ulcer Index is recommended as a measure of risk in various contexts where the standard deviation is usually used. The Ulcer Index can also be charted over time and used as a kind of technical analysis indicator, to show coins going into ulcer-forming territory, or to compare volatility in different coins.

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 wish to avoid by exiting long positions.

DISCLAMER: Information is provided only for educational purposes. Do your own study before taking any actions or decisions at the real market.