In forex trading, what does 'pips' refer to?

In forex trading, the term 'pips' refers to the smallest price increment in an exchange rate, as defined by market convention. It is a standardized unit that allows traders to measure price movements. Typically, a pip is the fourth decimal place in a currency pair's price. For instance, in a currency pair like EUR/USD, if the price moves from 1.1050 to 1.1051, that 0.0001 change is one pip. Understanding pips is crucial as they directly relate to profit and loss calculations in forex trading, providing a quantifiable measure that traders can use to assess their positions and manage risk effectively.

Other options do not accurately describe what a pip is: the total number of trades represents trading activity rather than price movement, accumulated profits refer to a trader's earnings, and interest rates pertain to the cost of trading currencies rather than the measurement of price changes.