The Ulcer index was developed by Peter G. Martin and Byron B. McCann. It is an indicator that is used to measure the riskiness of investments such as securities, commodities, mutual funds etc. It is created by factoring in the depth and duration of drawdown from recent peaks. A large UI value indicates that the security represents undue risk and an investor who holds it will likely need to wait longer for the investment’s price to climb back to its recent highs.
The Ulcer Index is used to measure the stress of holding a trade or investment by measuring price retrenchments. The Index is based on the notion that downward volatility is bad, but upward volatility is good.
Unlike standard deviation, the financial industry’s benchmark way of measuring the risk of a stock, which equally weights both violent increases to the upside (upside volatility) and violent decreases to the downside (downside volatility), the Ulcer Index takes a more enlightened approach that states that investors only care about the downside risk of a stock, not the upside risk (upside risk is good, it is equivalent to profits, if you are working with long stock, that is).