Ulcer Index

The ulcer index is a risk measure that scores an equity curve by the depth and the duration of its drawdowns rather than by the variability of its returns. It is computed by taking the percentage decline from the running maximum at each point, squaring those declines, averaging them across the period and taking the square root — so a deep drawdown counts far more than a shallow one, and a drawdown that persists counts more than one recovered quickly. The point of it is that standard deviation, which the Sharpe ratio rests on, penalises upside and downside alike, and nobody has ever complained about an unusually good month. The ulcer index only measures being underwater, which is closer to what a trader actually experiences and to what makes someone abandon a system at the worst possible moment. It is most useful compared across strategies over the same period rather than read as an absolute number, and it says nothing at all about return on its own: a flat account that never trades has an excellent ulcer index.