Ulcer Index on Gold

What it shows

A single line that never drops below 0, drawn under the candles with no marks. It is a percent of price, so the only fair yardstick is its own earlier readings on the same chart.

How Pravex works it out

1. At each candle, find the highest source value of the 14 candles up to it (the length).
2. That candle’s drawdown is 100 × (source − that highest) ÷ highest, which is 0 or negative.
3. Square the drawdowns of the last 14 candles, add them up and divide by the length.
4. Take the square root. That is the Ulcer Index.
5. A sum with invented prices: if the highest close is 100 and a candle closes at 98, its drawdown is 100 × (98 − 100) ÷ 100 = -2. Candles at the high add 0.

Settings

Setting	Default	What changing it does
Length	14	How many candles are checked for the high and for drawdowns. A longer length remembers an old fall for longer and moves slowly.
Source	Close	The price used for the high and the drawdowns. On hl2 a candle that dips and closes back up still counts half its low.

How traders read it

A reading near 0 means price has spent the window at or close to its high. A larger reading means it spent real time below it, and squaring makes a deep dip count much more than a shallow one.

Read it against its own recent range. A reading that climbs well above its usual level says the dip is both deeper and longer than normal for that chart.

Because rises add nothing, the line falls back to 0 once price makes a new high or the drop leaves the window. A fast fall of the line after 14 candles can be the old drop leaving, not a recovery.

When it misleads

Only falls from the recent high are counted, so a violent spike up reads 0 even though the market was wild. In a long, slow slide the window’s high keeps resetting lower, so the line understates the total fall. In calm gold hours small candles keep the readings low, and the line can jump at the first large candle that follows.

Questions and answers

Why is it called the Ulcer Index?

It scores the stress of holding through a drawdown: how deep and how long price sat below its recent high, as one percent figure. Rises add nothing.

Why not use standard deviation for drawdowns?

Standard deviation counts gaps from an average in both directions. The Ulcer Index squares only the gaps below the highest value of the window.

What is a good Ulcer Index level?

There is no fixed one. The value is a percent of price, so judge it against its own history on the chart and timeframe you trade.

Can the Ulcer Index track a whole year of gold drawdowns?

Yes, on daily candles with a length near 250. The default of 14 forgets a drop after 14 candles, so on an hourly chart it only covers the last two or three trading days.

Related: Relative Volatility Index, Mass Index, Bollinger BandWidth, every indicator.