Absolute and relative reference in Excel Formulas - How to use it, and what is it good for
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Relative Referencing

The formula’s default behavior in Excel is relative referencing.

Let’s understand this concept:
Assume that inside cell B5 you have the following formula:

If you copy this formula two cells downwards into cell B7 (either by doing “copy” and “paste”, or by dragging the fill handle), the formula in B7 will be:

As you can see, copying a formula downwards, will change the address inside the formula, in accordance to how far you pasted from the original cell. If you pasted it two cells downwards (from B5 to B7), then the address inside the formula will change accordingly from G2 to G4.
If you pasted it one cell above the original (into cell B4) then the formula would be:

Similarly, if you pasted the original formula in cell C5, then the formula pasted will be:
Hence, pasting in a horizontal distance from the original cell, will cause a matching change in the column of the address inside the pasted formula.

When is this relative referencing useful?
Let’s assume you have 200 students, in a table like the following:

table with students grades for calculating average

The average score should be calculated using a formula.

The first formula in cell E2 can be:
(you can also use the function: =average(B2:D2), it will behave exactly the same)

This formula can be simply dragged downwards by the fill handle, and you will get in cell E3 the following formula:
And in cell E4 the following formula:
And that’s exactly what you need. And if you really had 200 students, all you needed is to drag the formula 200 rows downwards, and you got 200 formulas, each one correctly corresponds to its own row.

Absolute Referencing

Look at the following formula:

It’s actually the same formula as =G4+1, but with $ signs.
The $ signs might looking a bit annoying making the formula less readable, but they have only one meaning to Excel: “Don’t change the address of cell G4 inside the formula when copied”. That’s why it’s called “Absolute Referencing”.

If you drag this formula downwards with the fill handle, you will get this:
and so on...

If you drag the following formula downwards:

You will get:

How do you get these $ sings?
When you type a formula, right after clicking a cell (hence getting its address inside the formula), push the key F4 in the keyboard.
You can also add these signs manually inside an address in a formula, by pressing the [Shift]+[4] keys at the correct places.

When is absolute referencing useful?
Let’s continue with the above example.
Now let’s assume that inside cell H3 the number 5 is written, which represent a bonus to the average scores.

table with students grades and a bonus cell

The final score will be the average plus the bonus. The formula in F2 could be:
In words: the value of cell E2 (the average) plus the value of cell H3 (the bonus).

The formulas we need in the following cells of column F are:
And so on...

As you see, the cell H3 should stay fixed. This will be achieved by typing the following formula (inside cell F2):
Now we can drag this downwards with the fill handle and get the following correct formulas:

Whenever you have a single specific cell that is relevant to many other cells, (you add it, or multiply it etc.), then this cell should be kept fixed by adding the $ signs.

Examples for such cells that should stay fixed inside formulas:
A cell in your Excel worksheet that represents the currency exchange rate.
A cell that represents the tax in a specific region.
A cell that represents a discount percentage, or a bonus.
A cell that represents an interest rate.