The average price is a weighted average of all your buy transactions for a stock. When you sell some shares, the oldest purchased shares are removed first (following the First In, First Out or FIFO method).
The formula for Average Price = (Total value of remaining buy trades after removing sold shares using FIFO + Net value of any new buy/sell trades today) / (Total remaining shares after removing sold shares using FIFO + Net shares from today's trades)
For Eg: let's say on May 5th you bought 100 shares of ABC Company at Rs.50 per share.
Later, you bought another 50 shares at Rs.60 per share.
If you then sell 50 shares, the oldest 50 shares purchased (at Rs.50) are removed first using FIFO.
Your average price would then be calculated as: ((100 - 50)*Rs. 50 + 50 * Rs.60) / (50 + 50) = Rs.55 per share
So it accounts for your purchase prices and quantities, removing the oldest shares first when you sell, and any new buy/sell orders on that day to calculate the weighted average price.
For more details and examples, please refer to the blog below