What is a Trend Line?

A trend line is a series of plotted data points that indicate a direction. The trend line may be extended to indicate a future direction by using a moving average calculation, exponential smoothing, or some similar technique. Trend line analysis is useful for budgeting and forecasting, and is commonly used in technical analysis. A technical analyst uses this information to support stock trading activity; this involves calculating a trend line from an underlying data set in order to ascertain the direction in which market prices are moving.

An example of a trend line appears in the following exhibit, where it is compared to cyclical and seasonal patterns.

When to Use a Trend Line Analysis

There are many situations in which trend line analysis can be useful. Here are several of the best applications:

Stock price movement analysis. Trendline analysis is commonly used in financial markets to predict future stock price movements. By plotting trendlines along highs and lows, investors can identify bullish or bearish trends. This helps traders determine optimal entry or exit points for their investments. A well-drawn trendline can signal potential reversals or continuations in market behavior.
Sales forecasting for a business. Businesses often use trendline analysis to predict future sales based on historical data. By applying a trendline to monthly or quarterly sales figures, patterns such as seasonality or growth can be detected. Managers use these insights to plan inventory, staffing, and marketing strategies. Accurate trend analysis can significantly improve budgeting and operational efficiency.
Manufacturing production trends. Trendline analysis is employed in manufacturing to monitor production output over time. By charting production volume, managers can quickly spot trends of improvement, stability, or decline. Identifying these patterns allows for proactive measures to correct inefficiencies or scale operations. It also aids in setting realistic production targets and timelines.
Economic indicators tracking. Economists use trendline analysis to evaluate indicators like GDP growth, unemployment rates, or inflation trends. By plotting data points over a significant period, they can observe long-term economic patterns. These insights guide policymakers, investors, and businesses in decision-making and strategic planning. Reliable trendlines can forecast recessions, recoveries, or periods of economic stability.