Trend Average Forecasting
Trend average forecasting is a forecasting technique used to forecast the values of a variable by identifying the underlying trend in its historical data. This method is useful when making predictions about the future value of a variable with a continuous magnitude such as the current rate of inflation, future exchange rates, and stock prices.
Trend average forecasting assumes that the underlying trend in the historical data points can be used to forecast future values of the variable. The technique begins by plotting the series of historical data points in a graph. From the graph, the analyst identifies the trend either through visual inspection or through a computerized mathematical fitting process. Once the trend is identified, the analyst then finds the average of the trend by calculating the average of the slope of the line representing the trend. The average of the trend is then used to predict the future values of the variable.
Trend average forecasting has been used to successfully predict future values of a given variable since the 1950s. Its success lies in its ability to identify the underlying trend in historical data points and to extrapolate that trend into the future. Trend average forecasting is especially useful when the historical data points have a clear and continuous trend that is expected to remain unchanged in the future.
Despite its success in forecasting future values, there are a few drawbacks to trend average forecasting. One of the drawbacks is that it is limited in its ability to anticipate changes in the underlying trend. This means that it may not be able to accurately predict values when the underlying trend changes. Additionally, trend average forecasting is limited in its ability to accurately estimate the extent of the changes in the underlying trend or to reliably predict future values when the underlying trend is not consistent or clear.
Another drawback of trend average forecasting is that it does not consider the different factors that may influence the variable in the future. For example, if analyzing the future stock price of a company, trend average forecasting does not factor in news events or changes in the companys financial performance that may impact the stock price. Similarly, when forecasting the value of inflation, trend average forecasting fails to consider the economic policies implemented by a government that may have an impact on the inflation rate.
Overall, trend average forecasting is an effective tool for predicting future values of a variable when the underlying trends are clear and consistent. However, it is limited in its ability to predict future values in more complicated scenarios, where the trend is hard to identify and more factors may influence the future values of the variable. Therefore, trend average forecasting should be used in conjunction with other forecasting techniques that incorporate more complex factors in their predictions.
