Beginner's Complete Guide to Buying Foreign Currency: 3 Major Investment Methods to Help You Get Started

In global asset allocation, buying foreign currencies has become a must-do for many novice investors. Compared to investing in a single currency, beginners need to understand not just “how to buy,” but more importantly, “why to buy” and “what to buy.” This comprehensive guide will lead you from zero to mastering the core concepts of foreign currency investment.

Why is now a good time for beginners to start buying foreign currencies?

Taiwan’s fixed deposit interest rates have been historically low, averaging around 1.7% annually, while major economies worldwide offer relatively higher rates. This interest rate gap is a primary reason many beginners are entering the foreign currency market.

Three major advantages of buying foreign currencies are worth noting:

First is very low barriers. Opening a foreign currency account requires only being over 20 years old, bringing ID to the bank, or even opening accounts online via banking apps. Second is hedging. When the home currency faces depreciation pressure (e.g., after the Russia-Ukraine conflict affecting the Ukrainian hryvnia), holding multiple currencies can effectively protect assets. Third is market fairness. The forex market is globally accessible and difficult to manipulate, making it more transparent than stock markets.

Additionally, the 24-hour operation of the forex market attracts many investors. When market trends turn unfavorable, you can exit at any time without being restricted by fixed trading hours.

The 4 categories of foreign currencies: which should beginners start with?

Taiwan banks generally offer 12 foreign currency investment options, including USD, AUD, JPY, EUR, and other major currencies. These currencies can be divided into four main types, each with different characteristics.

Policy-driven currencies (USD, EUR) are mainly influenced by central bank policies. When central banks adopt easing policies, their currencies tend to depreciate; when tightening, they tend to appreciate. These currencies’ movements are closely linked to central bank meetings, so beginners should pay close attention to policy developments.

Safe-haven currencies (JPY, CHF) are characterized by stability. These countries have stable political situations and developed economies, making their currencies less prone to large fluctuations. During global turmoil, many investors turn to these currencies for safety. For beginners, these currencies carry relatively lower risk.

Commodity currencies (AUD, CAD) are highly correlated with commodity prices. For example, Australia is the world’s largest iron ore exporter; when iron ore prices rise, the AUD appreciates; when they fall, the AUD depreciates. The price trends of these currencies are relatively easier to grasp, making them suitable for trend trading by beginners.

Emerging market currencies (CNY, ZAR) offer the highest interest rates but also come with higher volatility risks. While attractive due to high yields, they can lead to situations where “interest earned is offset by exchange losses.” Beginners should exercise caution.

For newcomers, it’s recommended to start with safe-haven and commodity currencies. The former offers lower risk and steady performance; the latter’s trends are easier to follow. USD, AUD, and JPY are common choices for beginners.

The core of making money in foreign currency trading: how do exchange rate and interest rate differentials work?

Many beginners are unclear about how profits are generated in foreign currency trading. In fact, returns come from two parts: exchange rate (spread) and interest rate differential.

Exchange rate (spread) refers to the difference between buying and selling prices at different times. For example, if you buy 1 USD at 33 TWD and sell when it appreciates to 35 TWD, you earn a 2 TWD profit.

Interest rate differential is the gap between the benchmark interest rates of different countries. If Taiwan’s fixed deposit rate is 2% and the US’s is 5%, the 3% difference represents potential profit. Holding USD deposits allows you to benefit from this interest spread.

However, a common mistake among beginners is focusing only on interest rate differentials and ignoring exchange rate risk. Suppose you earn 5% interest on USD, but during that period, the USD depreciates by 10%, resulting in a net loss. This is the “interest earned but exchange loss incurred” scenario.

Therefore, beginners must evaluate both: the currency’s interest rate level and the risk of exchange rate fluctuations.

Three ways to invest in foreign currencies: how should beginners choose?

Beginners face a key decision: which investment method to choose? The main options are:

Foreign currency fixed deposits are suitable for risk-averse newcomers. You open a foreign currency account at a bank, deposit funds, and select a fixed term (usually 3 months to 1 year). The advantages are safety and stability; the downside is low liquidity—early withdrawal may incur interest penalties.

Foreign currency funds offer more flexibility for intermediate beginners. You buy with TWD, and the fund company handles currency exchange. You can buy and sell anytime, with returns between savings and fixed deposits. Common options include money market funds and USD ETFs, with fees around 0.5%-0.6%.

Forex margin trading is suitable for experienced investors. It allows two-way trading (buy low, sell high) using leverage (typically 50-200x), magnifying gains. But risks are also higher, requiring strict risk management. ASIC recommends leverage below 30x for major currency pairs.

For beginners, it’s advisable to start with fixed deposits or funds, and consider margin trading only after gaining experience.

Master these currency pairs to open new investment horizons

Certain currency pairs are especially important in the global forex market. EUR/USD is the most traded pair, involving the two largest economies, and any small fluctuation can impact the entire market.

USD/JPY is a common tool for carry trades. Due to Japan’s long-term low interest rates, investors often borrow yen to invest in higher-yield currencies.

GBP/USD has a long trading history, reflecting the economic relationship between the UK and US.

USD/CHF embodies safe-haven demand. During market turbulence, the Swiss franc is favored for its stability.

For beginners, starting with USD and AUD is recommended, as their fundamentals are relatively easier to understand.

The 5 major factors influencing exchange rates: a must-read for beginners

Understanding the root causes of exchange rate fluctuations is essential. Inflation rate is the primary factor. Countries with low inflation tend to see their currencies appreciate; high inflation leads to depreciation.

Interest rates are closely linked to inflation. Rising interest rates attract foreign capital, pushing currencies higher.

Government debt levels can weaken a currency’s credibility. If markets expect a country cannot meet its debt obligations, foreign investment may withdraw, causing depreciation.

Trade conditions matter too. When export prices rise, demand for the currency increases, leading to appreciation.

Political stability is a long-term factor. Political turmoil increases investment risk, leading to capital outflows and currency depreciation.

Beginners should habitually monitor these five dimensions to develop an intuitive sense of currency movements.

Golden rules for beginners buying foreign currencies

First, avoid currencies you don’t understand. Although many currencies exist, the most traded are USD, JPY, etc. Focus on these with high liquidity and abundant information.

Second, closely watch exchange rate movements. Set weekly check-ins and follow economic news from key countries. CNBC, Bloomberg, and similar media are essential tools.

Third, diversify your holdings. Don’t put all your funds into a single currency. For example, hold USD fixed deposits and also allocate some funds to AUD funds as a hedge.

Fourth, learn to set stop-loss and take-profit points. Especially in margin trading, establish stop-loss levels when opening positions. Limit daily trades to 2 times to avoid overtrading.

Fifth, seize the right entry points. Don’t chase highs or sell at lows. Wait for clear trends before entering, often requiring 5 minutes or more to confirm.

Start with demo trading: the first step for beginners

Many beginners want to jump straight into real trading, but this is a common trap. The wisest approach is to practice with a demo account first.

Demo accounts require no real funds and allow testing strategies in a fully realistic environment. Through this process, you can assess your risk tolerance and emotional control. Many platforms offer free demo accounts (e.g., Mitrade provides $50,000 virtual funds), supporting various trading tools.

From demo trading, beginners will learn the importance of stop-loss, emotional discipline, and trading plans. Only after thorough practice and strategy validation should you proceed to small real trades.

Embark on your foreign currency journey

Having grasped the basics, the next step is practice. Start by choosing a suitable investment method, select target currencies (USD or AUD recommended), understand the economic trends of those countries, and develop a clear trading plan.

Remember: there are no shortcuts in currency trading. Successful beginners go through a full cycle of learning, practicing, and adjusting. Opening accounts, practicing with demo funds, and continuous learning are the paths every novice should follow.