What does the term “pips” refer to in forex trading?

In forex trading, the term “pips” refers to a unit used to measure changes in currency exchange rates. A pip, short for "percentage in point," is the smallest price movement that a given exchange rate can make based on market convention. Typically, for most currency pairs, a pip is equivalent to a change of 0.0001 in the exchange rate. This measurement is critical because it allows traders to quantify and measure gains and losses in their trades.

Understanding pips helps forex traders to track price movements accurately and to set stop-loss orders and take-profit levels effectively. This knowledge is essential for managing risk and making informed trading decisions. In contrast to the other options, which relate to different financial concepts, "pips" uniquely encapsulates a fundamental currency trading measure, reinforcing its significance in the context of forex markets.