Trendlines in charts A trend line is a straight line connecting multiple points on a chart. A trend is a movement in a particular direction The magnitude of the slope of a trend line, or steepness, indicates the strength of the trend. Trendlines can be used to forecast future !
Creating trendline in excel Select the graph and right click Select add Trend line
Trendline types A window opens with typesof trend line to select from 6Options Select the default optionfor trend line – Linear Click OK
Formatting trendline Right click on the trend line to format it. Select style, color and weight of your choice
Options - Name -Trendline Name - You can give custom name for your trendline such as .. Sales trend… etc.
Options - Forecast by using this forecast Optionyou can extend the trend lineforward or backward to thenumber of periods as desired Here I selected 6 periods(Months - in this case) forward
Options - Forecast You can Observe that the trendline gotextended in to the future by 6 periods This denotes if this trend continues, thesales of XYZ territory are likely to be like this
Options – Display equation and R2 Value by clicking “display equationon Chart” and display r-Squaredvalue on chart, you will be ableto display them on the graph Next slide explains them You can Set Intercept to anyvalue by clicking it and addingvalue (0 is default).As this Option is not used often in simple trendlines , explanation is beyond the scope of thisslide set.
equation This is the equation generated by excel thatholds the mathematical relationship of Sales andmonths. This equation will be unique to each data set This equation can be used to compute sales ofany future month to put it simply , here “y” denotes the sale(which is on Y axis) and x denotes the month So lets compute 13th month (Jan-2011 in thiscase) projection, using this equation y= ((17.311)*13)+296.39 that equals 521.43 So the likely sales projection for 13th month is521.43
R squared Value This is the R_squared Value for this trendline. This value denotes the reliability of the salesprojections. R squared value will range between 0 and 1 If the R squared value is 1, then the trend ismost predictable and reliable. The reliability of trendline goes up if the R-squared value is nearest to 1 Let us see the next example to understand itbetter.
R squared Value = 1 Here the R_squared Value is 1. Just take a look at the sales progress. With every passing month, this territory isadding $100 to the previous month. So, going by the trend, you can be almost sure,that the 13th month sales are . Remember, Trend lines and Forecasts means youare presuming the existing market conditions arenot going to change radically.
Six types of trend lines 1. Linear 2. Logarithmic 3. Polynomial 4. Power 5. Exponential 6. Moving Average
Best fit Trendline We have learnt that if R2 Value is near to 1, the reliability of trendline is better. So, now we need to use a trend line from the five available trend lines in excel menu to arrive at the most appropriate one to ensure that our forecast is most reliable. The other trendline left out is Moving average for which ,you will neither get the equation nor the R2 value. Simplest way to find the best fit trendline is to check every trend line’s R2 Value and use the trendline with highest R2 value ( Which is nearest to 1- out of 5
Rule of thumb to use type of Trendline 1. Linear trendline : use it if data values are increasing or decreasing at a steady rate. 2. Logarithmic trendline : Useful when the rate of change in the data increases or decreases quickly and then levels out. 3. Polynomial trendline : Used when there are data fluctuations like the sales following seasonal trends
Rule of thumb to use type of Trendline 4. Power trendline : Use with data that has values that increase at specific rate at regular intervals. 5. Exponential trendline : Use when data values increase or decrease rates that are constantly increasing. 6. Moving average trendline : Use it when uneven fluctuations are in data values