Want to make money by buying and selling foreign currencies? A complete guide to help you understand the profit logic of currency trading

Many investors want to make money by buying and selling foreign currencies, but often don’t know where to start. Unlike other investment methods, forex trading involves multiple variables such as exchange rate fluctuations, interest rate differentials, and global economic conditions. This article will break down the core concepts of currency trading, ways to profit, and specific strategies for beginners.

Differentiating Foreign Currencies and Forex: Understanding Investment Targets

Many beginners confuse the concepts of “foreign currencies” and “forex.” Foreign currencies refer to all foreign money other than the domestic currency, while forex (foreign exchange) refers to assets held in foreign currencies, including bank deposits, government bonds, and other financial instruments. In simple terms, foreign currencies are a specific form of forex.

Taiwanese investors interested in the foreign currency market typically have access to major currencies such as USD, AUD, CAD, HKD, GBP, CHF, JPY, EUR, NZD, SGD, ZAR, and SEK. Due to Taiwan’s long-term low benchmark interest rates, many investors turn to foreign currencies seeking higher yields.

How Buying and Selling Foreign Currencies Generates Profits: Exchange Rate and Interest Rate Differentials

The logic of making money through currency trading can be broken down into two core factors: exchange rate differences and interest rate differentials.

Exchange rate difference refers to the profit gained by exploiting changes in currency pair prices. For example, if an investor exchanges TWD to USD at an exchange rate of 30 TWD per USD, and later USD appreciates to 32 TWD per USD, converting back to TWD results in a profit.

Interest rate differential arises from differences in benchmark interest rates across countries. Suppose Taiwan’s fixed deposit rate is 2%, and the US is 5%, the 3% gap represents potential profit. However, investors must be cautious—earning interest rate differentials can be offset or even negated by unfavorable exchange rate movements, leading to the common phenomenon of “earning interest but losing on the exchange.”

For example, if an investor exchanges 33 TWD for 1 USD to invest in US fixed deposits earning 5%, but later the USD depreciates so that when converting back to TWD only 30 TWD per USD is received, the overall investment could result in a loss. Therefore, before trading, investors should clarify their goals—whether they aim for interest rate income or exchange rate gains.

Three Main Ways to Invest in Foreign Currencies: Choosing the Right Approach

Taiwanese investors typically have three main methods to participate in the foreign currency market, each with its own features and suitable audiences.

Foreign Currency Fixed Deposits: Stable Interest Rate Income

Foreign currency fixed deposits are the most basic form of currency investment, primarily aiming to earn bank deposit interest. Investors need to open a foreign currency account (e.g., E.SUN Foreign Currency Account), which can be done if they are over 20 years old with proper identification.

Advantages include low risk and simple operation, making it suitable for beginners. However, liquidity is limited—if the exchange rate reaches the target but the fixed deposit term isn’t completed, early withdrawal may incur interest penalties. Holding only a savings account yields very low interest, so many investors combine this with other methods for asset allocation.

Foreign Currency Funds: Flexible Dual-Return Options

Foreign currency funds do not have fixed terms and can be bought or sold at any time, with returns typically between savings and fixed deposits. Common types include money market funds and currency ETFs.

For example, UBS (Luxembourg) USD fund mainly invests in USD-related products, with management and custody fees around 0.5%. Yuanta USD Index ETF (00682U) tracks the USD index, with fees about 0.6%. Investors can invest directly in TWD, with the fund company handling currency exchange, earning both interest and exchange rate gains. This approach is especially suitable for investors needing flexible capital management.

Forex Margin Trading: High Leverage Short-term Opportunities

For experienced investors, forex margin trading offers high leverage (usually 50-200 times) to amplify gains. This method primarily profits from exchange rate differences rather than interest, as currency volatility is relatively low.

Forex margin trading features 24-hour trading, T+0 mechanisms, and low entry barriers. Investors only need a small margin to trade various currency pairs (e.g., AUD/USD, EUR/USD) online. However, regulatory bodies like ASIC recommend keeping leverage below 30 times for major pairs to control risk. Timing is crucial—best strategies involve entering when a trend is forming and avoiding false oscillations.

Categorizing Currencies and Developing Differentiated Investment Strategies

Based on the main factors influencing exchange rates, currencies can be divided into four categories, each with different investment logic.

Policy-Driven Currencies: USD and EUR

The movements of USD and EUR are mainly affected by central bank monetary policies. When central banks implement easing or cut interest rates, the currency tends to depreciate; tightening policies lead to appreciation. Investors should closely monitor policy announcements.

The Federal Reserve and ECB’s policy directions have a profound impact on global markets. For example, when the Fed adjusts interest rates, demand for USD changes, affecting USD exchange rates against other currencies.

Safe-Haven Currencies: JPY and CHF

Japan and Switzerland attract safe-haven capital due to their economic stability and political calm. Their central banks rarely change interest rates, and their economies are less correlated with global fluctuations. During market turmoil, investors tend to buy these currencies to protect assets.

Many traders use these currencies for carry trades—borrowing in low-interest-rate countries like Japan to invest in higher-yielding assets like USD, earning interest rate differentials.

Commodity Currencies: AUD and CAD

Australia and Canada’s economies heavily depend on commodity exports. Australia mainly exports iron ore and coal; Canada is known for oil. When commodity prices rise, these currencies tend to appreciate; when they fall, the currencies weaken.

For example, AUD/USD often declines when iron ore prices drop. For beginners, commodity currencies are relatively straightforward to analyze because their movements are closely linked to commodity markets.

Emerging Market Currencies: CNY and ZAR

These currencies come from growing economies and often offer higher fixed deposit rates, attracting high-yield seekers. However, they tend to have political instability, larger exchange rate fluctuations, limited international liquidity, and wider bid-ask spreads. Investing in emerging market currencies requires caution to avoid earning interest but suffering larger losses from volatility.

Major Global Currency Pairs: Understanding Market Trends

The US Dollar Index (DXY) is composed of six currencies: EUR (57.6%), JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%). Understanding these major pairs is vital for investment decisions.

EUR/USD

EUR/USD is the most traded currency pair globally, involving the two largest economies. The European Central Bank maintains relatively stable interest rates and shows optimism about the eurozone’s growth, supporting the euro. Conversely, policy uncertainty around the Fed can make the dollar less attractive, increasing EUR/USD’s appeal. As the Fed’s policy outlook becomes clearer, the market may reprice the euro.

USD/JPY

USD/JPY is a common carry trade currency pair. The Bank of Japan has paused rate hikes due to trade tensions but is expected to raise rates by 25 basis points later this year. The narrowing of the US-Japan interest rate gap is changing trading dynamics. Domestic political changes in Japan may also lead to continued volatility.

GBP/USD

GBP/USD has a long history as a reserve currency. Recently, the pound has appreciated mainly due to dollar weakness rather than UK fundamentals. With sluggish UK economic growth and expectations of rate cuts, the pound is expected to remain range-bound, with limited upside.

USD/CHF

The Swiss franc is favored for its stability and neutrality, making it an ideal short-term safe-haven. As the US faces trade and fiscal challenges, the franc’s safe-haven appeal increases, attracting international capital. In the medium to long term, slowing US economic momentum and Fed rate cuts are expected to support the franc.

Key Factors Influencing Exchange Rate Fluctuations

To succeed in buying and selling currencies, investors must understand the fundamental forces driving exchange rates.

Inflation is the primary factor. Countries with low inflation tend to see their currencies appreciate because their prices rise slowly, preserving purchasing power. Conversely, high-inflation countries’ currencies usually depreciate.

Interest rates are closely linked to inflation. Raising interest rates attracts foreign capital, boosting currency value; lowering rates has the opposite effect.

Government debt levels influence currency strength. Countries with high debt may struggle to attract foreign investment, leading to currency depreciation.

Trade conditions—the ratio of export to import prices—also matter. If export prices rise faster than import prices, national income increases, boosting demand for the currency and causing appreciation.

Political stability is crucial. Stable governments with transparent policies attract foreign investment, supporting currency strength. Political turmoil or uncertainty can lead to depreciation.

Practical Strategies for Beginners in Currency Trading

Once equipped with theoretical knowledge, investors need to translate it into practical actions. Here are key steps:

First, select targets. Understand the economic fundamentals of the currency pairs you plan to trade—policy directions, interest rates, export/import changes—and decide your trading bias. For example, if you expect the US to cut rates while Japan maintains current rates, you might go long JPY against USD. Accurate judgment is critical.

Second, develop a trading plan. Based on your risk tolerance, experience, and market conditions, set entry and exit points, stop-loss, and take-profit levels. Consider trading costs and market risks.

Third, maintain emotional discipline. Market volatility is inevitable. Avoid impulsive decisions driven by emotions. Continuous learning and practice help build experience.

Fourth, choose reliable trading platforms. Platforms should be secure, low-cost, feature-rich, offer diverse instruments, and execute trades swiftly. Compare options carefully before selecting.

Practical Tips and Risk Management for Currency Trading

Avoid unfamiliar currencies. Focus on major currency pairs (USD, EUR, JPY, etc.) rather than obscure ones.

Monitor exchange rates regularly. Currency prices are influenced by market news and economic data. Follow international news outlets like CNBC, Bloomberg, Yahoo Finance to stay informed.

Diversify your portfolio. Hold different assets such as USD fixed deposits and AUD funds to hedge risks. Once set, avoid frequent adjustments.

Use stop-loss and take-profit orders flexibly. Especially in margin trading, set appropriate stop-loss levels to prevent margin calls. For example, place stop-loss just below recent support levels. If the price falls below, exit automatically; if it rises, continue holding. Limit daily trades to two to avoid overtrading.

Time your entries carefully. Avoid chasing highs or selling lows. Plan your trades and execute according to your plan. Waiting for a confirmed trend (e.g., on 5-minute or longer charts) before entering can improve success rates. Different traders may prefer 30-minute or 2-hour charts.

Finally, any trading strategy remains theoretical until tested. Use demo accounts to practice and evaluate your strategies and risk management before committing real funds.