The Ulcer Index is a rather unique index. It was developed in 1987 by Peter Marin and Bryon McCann. The indicator is based on the assumption that upward momentum is profitable.
Therefore, it measures downside risk in terms of both period and depth of price decline.
You can use the indicator to trade any instrument on any time frame.
How to Use the Ulcer Index Indicator
The indicator index increases significantly when the price moves from a recent high. This means that the index will increase when the price falls sharply. It begins to decrease as the price moves towards the recent high. The index tends to zero if the currency pair reaches a higher high on each candle.
You should exercise caution if you are in a long position on a trade and the index begins to rise. If the index rises sharply, you might want to get out of the trade or use a tight risk management. However, if the index is falling, you should consider holding the trade or adding new positions. Ideally, you want the index to stay near zero. This indicates that the market is making new highs with each candle.
Trading Example
Look at how the index indicator is moving flat near the zero level. However, the index rises when prices fall, moving away from the recent high. The index falls when the uptrends resume and price moves to a recent high.
Setting
LookBackPeriod: The period used to calculate the indicator.
Conclusion
The Pestilence Index is a great indicator to track the performance of your long position. It comes in handy if you are holding a trade expecting it to rise. You want to make sure the index is falling or moving near the zero line so that your long position is profitable.
