The ulcer index is a stock market risk measure or technical analysis indicator devised by Peter Martin in 1987,[1] and published by him and Byron McCann in their 1989 book The Investors Guide to Fidelity Funds.
It is a measure of downwards volatility, the amount of drawdown or retracement over a period.
It is the downside that causes stress and the stomach ulcers that the index's name suggests.
(The name predates the discovery that most gastric ulcers are caused by a bacterium rather than stress.)
The term ulcer index has also been used (later) by Steve Shellans, editor and publisher of MoniResearch Newsletter for a different calculation, also based on the ulcer-causing potential of drawdowns.
The quadratic mean (or root mean square) of these values is taken, similar to a standard deviation calculation.
Martin advises against sampling less often than weekly though, since for instance with quarterly prices a fall and recovery could take place entirely within a period and thereby not affect the index.
Martin recommends his index as a measure of risk in various contexts where usually the standard deviation (SD) is used for that purpose.
In both cases, annualized rates of return would be used (net of costs, inclusive of dividend reinvestment, etc.).
The index can also be charted over time and used as a kind of technical analysis indicator, to show stocks going into ulcer-forming territory (for one's chosen time-frame), or to compare volatility in different stocks.