It is the folder from what the node-red will serve files. And it is the folder you create (or choose). Most people create it under the .node-red catalog so all the related stuff is in one place. The name of the folder does not matter, I call it static just cos I just see it that way. Then you'll need to change the node-red settings.js to let the node-red know the location of the static folder.
Many threads talk about how to do it - try this How to enable ability to input local image files in to node red dashboard
