In currency trading, what does the term 'pips' refer to?

The term 'pips' is used in currency trading to refer to the smallest price move that an exchange rate can make based on market convention. In forex trading, a pip typically represents a one-digit movement in the fourth decimal place for most currency pairs. This means if the EUR/USD changes from 1.1000 to 1.1001, that 0.0001 increase is referred to as one pip. Understanding pips is crucial for traders because it directly relates to profit and loss calculations, allowing them to gauge the potential changes in currency values in a standardized way. This unit of measurement helps traders communicate about price movements succinctly and accurately within the trading community.