Charting with Trend Line

[EssKayKay]

I have a question on charting in Excel. I have a spreadsheet tracking investments over the past few years. I include a “Trend Line” in the chart via a polynomial regression. However, I’m confused on the “order” of the trend line. It allows values 2-6. It appears 2 is the most linear with varying degrees of alignment after that. Without getting too technical as I am no mathematician, what does the “order” mean and what order would you recommend? I am using Excel 2003.

Thanks,
Steve K.

 

[shg]

The order of a polynomial is the highest (integer) power to which the variable is raised

1st order: y=ax
2nd order: y = ax^2 + b
3rd order: y=ax^3 + bx^2 +cx + d
...

I wouldn't recommend using any type of polynomial for modeling investment returns. It doesn't tell you anything useful.

 

[EssKayKay]

Thank you SHG for your response. I will just disregard my trend line.

 

[shg]

A linear trendline would tell you whether things are generally headed in a good direction. An exponential trendline models constant year-over-year growth (or decline).

 

[EssKayKay]

OKAY - again my thanks...