Simply put, ABP refers to the average price at which an investor has purchased a specific cryptocurrency. If the asset was bought multiple times, the ABP is a weighted average of all purchase prices. This is particularly relevant in strategies like dollar-cost averaging, where investors periodically buy a fixed dollar amount of an asset, regardless of its price.

What Average Buying Price is Not

It’s important not to confuse ABP with the Investment Break Even Price. While ABP focuses on the average purchase cost of an asset, the Investment Break Even Price considers the total invested amount and marked profits or losses to determine the point at which an investment neither gains nor loses money.

Calculating the Average Buying Price

Calculating ABP involves determining the weighted average of all buy transactions, with each buy contributing to the overall average based on the number of units purchased.

ABP Formula

\[ \text{ABP} = \frac{(\text{previous ABP}\times \text{previous open position})+(\text{current buy price} \times \text{current buy amount})}{\text{previous open position} + \text{current buy amount}} \]

• previous_open_position: The sum of all buy and sell transaction amounts made before the current buy transaction.

Note:

1. Deposits and withdrawals are not considered in ABP calculations.
2. Earn payouts are considered at a price of 0.

Impact of Buying and Selling on ABP

Understanding how buying and selling affect the ABP is crucial for informed trading. When you buy more cryptocurrency, the ABP adjusts based on the new purchase price and quantity. Selling, on the other hand, does not change the ABP but reduces the number of units held. Thus, ABP serves as a constant reference point to evaluate the profitability of your remaining holdings.

Examples: ABP When Trading Bitcoin

Let’s walk through a few examples to illustrate how ABP is calculated and used in trading:

Initial Purchase:

• Buy: 2 BTC @ $35,000 each
• previous_ABP: $0
• previous_open_position: 0
• ABP Calculation:

\[ \text{ABP} = \frac{0 \times 0 + 35,000 \times 2}{0 + 2} = \$35,000 \text{per BTC} \]

Second Purchase:

• Buy: 1 BTC @ $40,000
• previous_ABP: $35,000
• previous_open_position: 2
• ABP Calculation:

  \[ \text{ABP} = \frac{35,000 \times 2 + 40,000 \times 1}{2 + 1} = \$36,666.67 \text{ per BTC} \]

First Sale:

• Sell: 1 BTC @ $45,000
• previous_open_position: 3
• ABP After Sale: Remains $36,666.67 per BTC, as selling does not affect the ABP.

Third Purchase:

• • Buy: 2 BTC @ $30,000 each
  • previous_ABP: $36,666.67
  • previous_open_position: 2 (after selling 1 BTC)
  • ABP Calculation:

    \[ \text{ABP} = \frac{36,666.67 \times 2 + 30,000 \times 2}{2 + 2} = \$34,444.44 \text{ per BTC} \]

How ABP Influences Trading Decisions

The ABP is a valuable tool for making strategic trading decisions. Here’s how it can be applied:

1. Risk Assessment: By comparing your ABP with the current market price, you can evaluate the risk-reward ratio of holding or selling the asset.

2. Profit and Loss Analysis: Traders can quickly determine their unrealized profits or losses by comparing the current market price with the ABP.

3. Strategic Buying and Selling: Use ABP to guide further buys (to lower your ABP) or sells (to take profits).

Practical Examples of Using ABP in Cryptocurrency Trading

1. Taking Profits: If the market price is significantly higher than your ABP, consider selling a portion of your holdings to lock in profits. For instance, if your ABP for Ethereum is $2,000 and the current price is $3,000, selling part of your holdings could secure a profit.

2. Lowering ABP Through Additional Purchases: If a cryptocurrency’s price drops below your ABP, buying more can lower your ABP, reducing the impact of volatility. This strategy, known as dollar-cost averaging, can be effective if the market rebounds.

3. Strategic Reinvestment: After taking profits from a coin that has exceeded your ABP, consider reinvesting in other cryptocurrencies with a lower ABP compared to the current market price, or in those showing higher growth potential.

4. Limiting Loss: If your ABP for Bitcoin is $32,000, you might set an alert at $28,000 to sell and close the position, limiting potential losses while allowing room for normal market fluctuations.