6.
Process or Product Monitoring and Control
6.4. Introduction to Time Series Analysis 6.4.3. What is Exponential Smoothing?


Forecasting Formula  
Forecasting the next point  The forecasting formula is the basic equation $$ S_{t+1} = \alpha y_t + (1\alpha) S_t, \,\,\,\,\, 0 < \alpha \le 1, \,\,\,\,\, t > 0 \, . $$  
New forecast is previous forecast plus an error adjustment 
This can be written as:
$$ S_{t+1} = S_t + \alpha \epsilon_t \, , $$
where \(\epsilon_t\)
is the forecast error (actual  forecast) for
period \(t\).
In other words, the new forecast is the old one plus an adjustment for the error that occurred in the last forecast. 

Bootstrapping of Forecasts  
Bootstrapping forecasts  What happens if you wish to forecast from some origin, usually the last data point, and no actual observations are available? In this situation we have to modify the formula to become: $$ S_{t+1} = \alpha y_{orgin} + (1\alpha) S_t \, , $$ where \(y_{origin}\) remains constant. This technique is known as bootstrapping.  
Example of Bootstrapping  
Example 
The last data point in the previous example was 70 and its forecast
(smoothed value \(S\))
was 71.7. Since we do have the data point
and the forecast available, we can calculate the next forecast
using the regular formula with \(\alpha = 0.1\) as
$$ \begin{eqnarray}
S_{t+1} & = & \alpha y_{orgin} + (1\alpha) S_t \\
& = & 0.1(70) + 0.9(71.7) \\
& = & 71.5 \, .
\end{eqnarray} $$
But for the next forecast we have no data point (observation). So now we compute: $$ S_{t+2} = 0.1(70) + 0.9(71.5) = 71.35 \, . $$ 

Comparison between bootstrap and regular forecasting  
Table comparing two methods 
The following table displays the comparison between the two methods:


Single Exponential Smoothing with Trend  
Single Smoothing (short for single exponential smoothing) is not very good when there is a trend. The single coefficient \(\alpha\) is not enough.  
Sample data set with trend 
Let us demonstrate this with the following data set smoothed with an \(\alpha\)
of 0.3:


Plot demonstrating inadequacy of single exponential smoothing when there is trend 
The resulting graph looks like:
