Ulcer Index Indicator - Forecast Shorts and Filter Volatile Trades
Overview of the Ulcer Indicant
The Ulceration Index measures the amount of risk on a deal out. Hence the name ulcer for the pain and stress these moves can inflict happening the less consummate trader.
Therein article, we will test the indicator to see how well it can forecast extremes in the commercialise.
How to Calculate the Ulceration Index
The index is all about shrewd the level of risk by sounding at how far a stock has fallen from recent highs.
The deliberation of the ulcer index is a three-step process [1].
Step 1
Drawdown Percentage = ((Unventilated – Highest Finale over 14-periods)/Highest Conclude over 14-periods)
Footprint 2
Squared Average = (14-time period Sum of Percentage Drawdown Squared)/14
Step 3
Ulceration Index number = Honorable Settle of Squared Mediocre
What Does the Ulceration Index number Tell The States?
Ulcer Index
The index is a way for you to quickly sized-up the level off of unpredictability in a sell at a glance. At that place are cardinal things that I see slightly differently than the other articles on the internet.
#1 – Peaky Readings = Clock to Get Short
There are several blog posts which state that a high version shows an increased level of risk and should be avoided. I 100% concord with that statement, exclude why quash the standard altogether?
Wherefore not cooccur with the trend and sire short?
For example, information technology's innocent that erstwhile you see readings above 40, a stemm is in real trouble.
Now, this doesn't mean you should get short promptly on a high reading, but rather postponemen for the threadbare to rally on light volume and then open a trade.
Since you are short, the high recital means it's actually a low-risk opportunity for you versus if you were long.
#2 – Low Readings Some other Short Opportunity
Low Readings Are Small Opportunities
In the above chart, do you take in how the low readings present short opportunities?
Again, you can't go unsuccessful there and right start shorting on every low reading, you will need more merging from graph patterns and otherwise technical indicators.
Does the Ulcer Index Indicator Work out Intraday?
The indicator works sportsmanlike too on an intraday foundation as it does on daily and period of time bars.
Under is a graph of the stock ABID. Notice how the indicant tracks the excitability of the stock with the same level of accuracy as the longer timeframe charts mentioned above.
Intraday Price Chart
My Issue with the Indicator
Lagging Indicator
Patc the indicator wish provide an indication of increased price volatility, it is quite delayed.
The argue the above charts come out to nail each top is that there is a 14-Clarence Shepard Day Jr. lookback period. When you are trading the stocks in period of time it will Be very difficult to use the indicator for any forecast purposes.
Besides A good deal Subjectivity
Now Don't get me wrong. Whatever indicant or trading method will require some level of analysis. Thither just is none agency around IT.
However, the ulceration index indicator on unmatched graph can mean an entirely divergent thing on another. For this reason, I feel the level of mastery required to gain a firm grip along the indicator places overmuch of a burden when analyzing stocks.
Where the Indicator Works
Where I can see value in the indicator is in simply gauging the volatility of a stock and sizing astir bird's-eye market behavior.
Using the Ulcer Index equally a Volatility Filter
The indicator can do one thing and one thing really well. Information technology stool provide you with an superior volatility indicator and how overmuch a line of descent has retraced from recent highs [2].
For Maine, I do not trade penny stocks surgery stocks with high volatility.
Why you may ask?
Because observance my stops is one of my biggest weaknesses. Therefore, trading devalued excitableness stocks forbid me from placing combust trades.
So, a simple filtering method is to set a level bes measure of the ulceration index indicator that you will trade. For example, if the stock has an ulcer index indicator assess of 10 or more you will not place any trades.
Ulcer Index finger Below 10
This way you are non taking any long positions in a stock that has the voltage of causing you real hurting.
Assessing The Market
Another way to leverage the indicator is to appraise the broad marketplace.
Whether you are a day trader surgery long-terminal figure investor, information technology's a good melodic theme to have some indication of what the market is up to.
Low-Risk Breakout
Above is a 5-minute graph of the S&P 500 E-mini.
The full point I am illustrating above is that you potty too use the ulcer index indicant to gauge the level of hazard prior to a breakout.
Please note this does non mean the breakout volition work, but it lets you have it away there is a depress horizontal surface of risk prior to entrance the trade.
If you do not trade futures, IT's as wel just favorable to know the securities industry is moving high with lower risk.
Why is the &ger lower?
Recovered atomic number 3 you can visit before the breakout, the market was flat before showing a sign of strength. This kit and boodle in your favor because you put up now place a tight stop below the recent congestion.
How Can TradingSim Help?
TradingSim has the ulceration index indicator in our library of technical indicators. From what I can see, the indicant requires further analysis for you to build a system.
Rules such as thresholds for filtering and specific rules for going long and short.
External References
- Ulcer Index. Wikipedia
- Elsner, Gary. The Ulcer Index. traders.com
POPULAR LESSONS IN THE Course of study: Clarence Day Trading Indicators
Source: https://tradingsim.com/blog/ulcer-index/
Posted by: burketharest.blogspot.com
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