"I always avoid prophesying

beforehand because it is much better

to prophesy after the event has
already taken place. "
--Winston Churchill
 Forecasting using trend analysis
• Part 1. Theory
• Part 2. Using Excel: a demonstration.
• Assignment 1, 2

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 Learning objectives
To learn how:
• To compute a trend for a given time-series
data using Excel
• To choose a best fitting trend line for a
given time-series
• To calculate a forecast using regression
equation

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 Main idea of the trend analysis
forecasting method
• Main idea of the method: a forecast is
calculated by inserting a time value into the
regression equation. The regression equation is
determined from the time-serieas data using the
“least squares method”

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Prerequisites: 1. Data pattern:
Trend

Trend (close to the linear growth)

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 Prerequisites: 2. Correlation

There should be a sufficient correlation

between the time parameter and the
values of the time-series data

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 The Correlation Coefficient
• The correlation coefficient, R, measure the
strength and direction of linear relationships
between two variables. It has a value
between –1 and +1
• A correlation near zero indicates little linear
relationship, and a correlation near one
indicates a strong linear relationship
between the two variables
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 Main idea of the trend analysis
method
• Trend analysis uses a technique called least squares to fit
a trend line to a set of time series data and then project the
line into the future for a forecast.
• Trend analysis is a special case of regression analysis
where the dependent variable is the variable to be
forecasted and the independent variable is time.
• While moving average model limits the forecast to one
period in the future, trend analysis is a technique for
making forecasts further than one period into the future.

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The general equation for a trend
line
Where:
• F – forecast,
F=a+bt
• t – time value,
• a – y intercept,
• b – slope of the line.

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 Least Square Method
• Least square method determines the values for a
and b so that the resulting line is the best-fit line
through a set of the historical data.
• After a and b have been determined, the equation
can be used to forecast future values.

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The trend line is the “best-fit”
line: an example
Municipal public libraries in Lithuania in 1991-2002
Number of libraries

1700
1650
1600
1550
1500
1450
1400
1350
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year

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Statistical measures of goodness
of fit
In trend analysis the following
measures will be used:

• The Correlation Coefficient

• The Determination Coefficient

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The Coefficient of Determination
• The coefficient of determination, R2,
measures the percentage of variaion in the
dependent variable that is explained by the
regression or trend line. It has a value
between zero and one, with a high value
indicating a good fit.

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 Goodness of fitt: Determination
Coefficient RSQ
• Range: [0, 1].
• RSQ=1 means best fitting;
• RSQ=0 means worse fitting;

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 Evaluation of the trend analysis
forecasting method
• Advantages: Simple to use (if using
appropriate software)
• Disadvantages: 1) not always applicable for
the long-term time series (because there
exist several ternds in such cases); 2) not
applicable for seasonal and cyclic datta
patterns.

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 Part 2. Switch to Excel

Open a Workbook trend.xls, save it to

your computer
 Working with Excel
• Demonstration of the forecasting procedure
using trend analysis method
• Assignment 1. Repeating of the forecasting
procedure with the same data
• Assignment 2. Forecasting of the
expenditure

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 Using Excel to calculate linear
trend

• Select a line on the diagram 

• Right click and select Add Trendline 
• Select a type of the trend (Linear)

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Part 3. Non-linear trends

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 Non-linear trends
Excel provides easy calculation of the following trends

• Logarythmic
• Polynomial
• Power
• Exponential

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 Logarithmic trend

12
y = 4,6613Ln(x) + 1,0724
10
R2 = 0,9963
8
6
4
2
0
0 2 4 6 8

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 Trend (power)

10
y = 0,4826x1,5097
8 2
R = 0,9919
6
4
2
0
0 2 4 6 8

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 Trend (exponential)

80
1,0055x
y = 0,0509e
60 2
R = 0,9808
40

20

0
0 2 4 6 8

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 Trend (polynomial)

8
3 2
y = -0,1142x + 1,6316x - 5,9775x + 7,7564
6
R2 = 0,9975
4

0
0 2 4 6 8

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Choosing the trend that fitts best
• 1) Roughly: Visually, comparing the data
pattern to the one of the 5 trends (linear,
logarythmic, polynomial, power,
exponential)
• 2) In a detailed way: By means of the
determination coefficient

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End