Ulcer Index for Confirming Trends Through Downside Volatility
Summary
The Ulcer Index is presented as a measure of downside volatility, originally devised by Peter Martin for evaluating stock market funds. The document explains its use as a trend confirmation tool: a falling index alongside rising prices suggests downside volatility is decreasing, while a rising index alongside falling prices suggests it is increasing. The examples are described qualitatively, without numerical results or a calculation method.
The indicator can be applied across instruments and timeframes, but shorter periods may produce more volatility and false signals. The document advises using it alongside other parts of a trading strategy rather than relying on it alone. It provides no empirical testing, performance comparisons, or guidance on parameter selection, so the described price and index relationships should be treated as interpretation examples rather than evidence of predictive power.
Key ideas
- The Ulcer Index is described as a measure of downside volatility.
- A declining index alongside rising prices indicates decreasing downside volatility in the examples.
- A rising index alongside falling prices indicates increasing downside volatility in the examples.
- Shorter timeframes may make signals more volatile and prone to false readings.
- The indicator is presented as confirmation alongside other strategy components, not as a standalone method.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.