Complete Guide to Foreign Currency Trading: Master Forex Buying, Selling Strategies, and Investment Techniques from Scratch

Why Learn Forex Trading?

Many Taiwanese investors face the same dilemma: bank fixed deposits offer only 1.7% interest, and assets depreciate faster than savings grow. That’s why more and more people are turning to foreign currency investments. Compared to local savings, foreign currencies not only provide higher interest income but also enable capital appreciation through exchange rate fluctuations.

The appeal of forex trading lies in its unique two-way trading mechanism. Unlike stocks, which can only go up, the foreign exchange market allows investors to profit from both rising and falling prices. Additionally, the global forex market operates 24 hours a day, allowing investors to adjust strategies at any time based on market changes. This flexibility is unmatched by traditional investment methods.

From a risk management perspective, holding multiple currencies can effectively hedge against the depreciation risk of a single currency. When the domestic currency faces downward pressure, foreign currency assets can protect your wealth from shrinking.

Currencies and Forex: Clarifying the Concepts

Many beginners easily confuse these two concepts. Simply put, foreign currencies refer to all foreign currencies other than the domestic currency, while forex encompasses a broader range, including foreign cash, foreign currency deposits, foreign bonds, stocks, and other assets denominated in foreign currencies.

Forex trading includes four levels:

• Direct exchange of banknotes and coins
• Trading of various foreign currency certificates (drafts, deposit slips, etc.)
• Trading of foreign currency securities (government bonds, corporate bonds, stocks)
• Buying and selling other foreign currency assets

Therefore, foreign currency trading is one form of forex trading and is the fundamental trading method in the forex market.

The Core Logic of Making Money with Foreign Currencies: Exchange and Interest Rate Differentials

Many people know they can make money with foreign currencies but are unclear about the specific sources of profit. In fact, foreign currencies are like a special financial product, with returns mainly coming from two aspects: exchange rate differentials and interest rate differentials.

Exchange rate differential refers to the price difference during currency conversion. Investors profit by buying and selling the same currency pair at different times to earn the spread. For example, buying USD at 30 TWD and selling at 33 TWD yields a 3 TWD profit per unit.

Interest rate differential comes from the differences in benchmark interest rates across countries. If Taiwan’s fixed deposit rate is 2% and the US is 5%, holding USD can earn an additional 3% annual interest.

However, this is not a risk-free arbitrage opportunity. Many investors face situations like “earning interest but losing on the exchange rate.” For example, buying USD at 33 TWD with a 5% interest rate, but if the USD later depreciates to 30 TWD, the overall investment results in a loss, as the exchange rate loss offsets the interest gain.

This is why, before starting forex trading, you must clarify your investment goals—whether to pursue stable interest income or short-term price differentials—and fully assess exchange rate volatility risks, developing appropriate risk management strategies.

Comparing the Three Main Foreign Currency Investment Methods

Taiwanese investors mainly have three ways to participate in the foreign currency market, each with different features and suitable audiences.

Foreign Currency Fixed Deposit: Stable Interest Income

This is the simplest and safest entry method. Investors open a foreign currency account at a bank, deposit funds as fixed-term deposits, and earn interest periodically. The advantage is very low risk, only exposed to exchange rate fluctuations, with no concern about principal loss.

Opening an account is straightforward—if you are over 20, bring ID and visit a bank counter or use a mobile app. Deposit terms can be 3 months, 6 months, 1 year, etc.

The downside is lower liquidity. If the exchange rate has already reached your target but the deposit has not matured, early withdrawal may incur interest penalties. Additionally, the savings interest rate is very low, and options between fixed and savings accounts are limited.

Foreign Currency Funds: Combining Yield and Flexibility

Foreign currency funds are an intermediate option between fixed deposits and margin trading. Investors do not need to lock in a term and can buy or sell at any time. The annualized return usually falls between savings and fixed deposit rates. The biggest advantage is flexible fund management, suitable for those who need to adjust their portfolios frequently.

Common foreign currency funds include money market funds and currency index funds. The former tracks short-term bond yields, while the latter tracks specific currency performance indices. Investors can invest directly in TWD, with fund companies handling currency exchange, saving the hassle of manual conversion.

Management fees are typically around 0.5% to 0.6%, which is reasonable. You can earn interest income while also participating in gains from exchange rate movements.

Forex Margin Trading: High-Risk, High-Reward Trading

If you have some trading experience and are dissatisfied with stable interest income, and want to capture larger short-term gains, forex margin trading might be an option.

This type of trading does not pursue interest income but profits solely from exchange rate differentials. Since currency volatility is generally smaller than stocks, trading platforms often offer leverage of 50 to 200 times, magnifying both gains and risks.

Advantages of forex margin trading include:

• 24-hour trading, unaffected by stock market hours
• T+0 mechanism, multiple trades within the same day
• Low entry barrier, requiring only a small amount of margin
• Wide variety of trading pairs, including major global currencies

The key risk is leverage’s double-edged nature. With 50x leverage, a 2% adverse move can wipe out 100% of your principal. Therefore, choosing a reasonable leverage level (Australian regulators recommend no more than 30x for major currency pairs) and strict stop-loss settings are crucial.

The Four Major Categories of Currencies and Their Investment Characteristics

Taiwan banks typically offer 12 currencies for investors, including USD, EUR, JPY, GBP, AUD, CAD, CHF, and others. These currencies can be grouped into four categories based on their driving factors.

Policy Currencies: USD and EUR

The exchange rates of these currencies are mainly influenced by central bank monetary policies. USD and EUR are major global currencies, with their strength directly affected by decisions on interest rate hikes, cuts, and quantitative easing.

Investors should closely monitor central bank meeting dates and policy signals. When central banks signal a hawkish stance (favoring rate hikes), the currency tends to appreciate; dovish signals (favoring rate cuts) may lead to depreciation.

Safe-Haven Currencies: JPY and CHF

Japan and Switzerland are known for stability and neutrality. Their central banks rarely change interest rates, and their economies and political risks are relatively low. During global turmoil, these currencies are often seen as safe havens.

Investors typically buy JPY or CHF during crises to hedge risks. Interestingly, both countries have low interest rates, making them popular funding currencies for carry trades—borrowing these currencies to invest in higher-yielding countries and earning the interest differential.

Commodity Currencies: AUD and CAD

Australia is famous for iron ore exports, and Canada relies on oil and natural gas. These currencies are highly correlated with commodity prices.

When iron ore or oil prices rise, these countries need more of their currencies to complete exports, leading to currency appreciation; the opposite occurs when prices fall. For example, from 2021 to 2024, as iron ore prices declined, the AUD also depreciated.

These currencies are suitable for beginners because their trends are relatively easier to grasp—simply follow commodity price movements to predict currency trends.

Emerging Market Currencies: RMB, ZAR, etc.

Currencies from developing economies often offer higher interest rates due to rapid growth. Investors mainly seek higher interest income.

However, risks are higher: political instability can cause sharp exchange rate fluctuations, and low liquidity can lead to larger bid-ask spreads. The ZAR, despite attractive interest rates, is highly volatile and lacks international liquidity, so caution is advised.

Advice for Beginners: Consider factors like interest rates, exchange rate stability, and international liquidity. Mainstream currencies like USD and AUD offer a balanced approach. Combining safe-haven and commodity currencies can provide reasonable returns while diversifying to hedge risks.

Current Market Trends of Major Currency Pairs

EUR/USD

The EUR/USD pair is the most traded currency pair globally, influencing the entire forex market. In 2024, the Federal Reserve started cutting rates, while the European Central Bank maintained rates, pushing the euro to a four-year high.

Analysts believe that US policy uncertainty has increased dollar risk premiums, whereas the ECB’s independence and more stable policies favor holding euros.

USD/JPY

The JPY is a primary funding currency for carry trades due to its low interest rates. With the Fed cutting rates and expectations of the Bank of Japan raising rates, the US-Japan interest differential is narrowing. In the short term, this pair is expected to remain volatile.

GBP/USD

The GBP has performed strongly this year mainly because of dollar weakness rather than fundamental improvements in the UK economy. As the dollar stabilizes, the GBP may face a correction. Additionally, the UK’s sluggish economic growth and expectations of rate cuts by the Bank of England suggest limited upside for the pound.

USD/CHF

The Swiss franc is viewed as a safe-haven currency. During the US trade and fiscal issues, the CHF’s safe-haven status has attracted large capital inflows, pushing its exchange rate higher. In the medium to long term, a weakening dollar trend will support the CHF.

Five Major Factors Influencing Exchange Rate Fluctuations

Investors must understand the factors driving exchange rate changes to make informed foreign currency trading decisions.

Inflation Rate: Countries with low inflation tend to see their currencies appreciate. Low inflation indicates slow price increases for goods and services, maintaining currency purchasing power and attracting foreign capital.

Interest Rate Levels: Higher interest rates attract foreign investment in bonds and deposits, pushing up the currency’s value. Rate hikes generally lead to currency appreciation; rate cuts tend to cause depreciation.

Government Debt: Countries with high debt levels struggle to attract foreign investment and may face inflationary pressures. When markets anticipate debt deterioration, they sell government bonds, leading to currency depreciation.

Trade Conditions: When export prices rise relative to import prices, national income increases, boosting demand for the domestic currency and causing appreciation. This is especially beneficial for countries reliant on commodity exports.

Political Stability: Countries with stable politics and transparent policies attract more foreign investment. Conversely, political turmoil can lead to capital outflows and currency depreciation.

Practical Guide for Beginners in Foreign Currency Trading

Understanding the Two-Way Mechanism

Traditional investments only allow “buy low, sell high.” The forex market is different; investors can also “sell high, buy low.”

Suppose you expect the euro to depreciate against the dollar. You can first sell EUR/USD, and when the euro indeed falls, buy back at a lower price to profit. This mechanism allows forex investors to profit in any market environment.

Three Core Steps

Step 1: Currency Pair Selection. Decide whether to go long or short on a currency pair. Research the central bank policies, interest rate differentials, and major export commodities of the involved countries. For example, if you expect the US to cut rates this year while Japan’s rates stay unchanged, consider going long JPY/USD.

Step 2: Develop a Trading Strategy. Based on your risk tolerance and experience, set clear entry points, stop-loss, and take-profit levels. Consider market risks, transaction costs, and time investment.

Step 3: Strictly Follow Your Plan. Stick to your strategy, avoid being swayed by short-term volatility, and refrain from chasing highs or panic selling.

Five Practical Tips

Trade Only Familiar Currencies. Beginners should limit themselves to major pairs like USD, JPY, etc., and avoid high-interest exotic currencies that may be more volatile.

Continuously Monitor Market News. Subscribe to international financial news, watch central bank announcements, economic data releases, and stay updated on major events affecting exchange rates.

Diversify Your Portfolio. Don’t put all funds into one currency. Hold a mix, such as USD fixed deposits, AUD funds, etc., to hedge risks.

Use Stop-Loss and Take-Profit Flexibly. Especially in margin trading, setting stop-loss orders near support levels is crucial. When prices break support, exit automatically to prevent larger losses. Limit to 2 trades per day to avoid overtrading.

Master Entry Timing. Don’t chase highs or sell in panic. Wait for clear trend confirmation. Use different timeframes like 5-minute, 30-minute, or 120-minute charts to match your trading style.

Final Advice on Foreign Currency Investment

Foreign currency trading requires knowledge, discipline, and patience. Beginners should start with fixed deposits or funds to gain experience before moving to more complex trading.

Most importantly, don’t be tempted by high returns to ignore risks. Every trade should be based on a clear rationale, not emotion or market rumors. Practice with demo accounts to test strategies before risking real money.

Remember: the goal of foreign currency investment is to protect and grow your assets, not to gamble. Caution, rationality, and persistence are the keys to long-term success in the forex market.