Foreign Currency Investment Guide: Building the Correct Understanding of Profiting from Forex from Scratch

Do you have spare funds but don’t know how to make them grow? The TWD fixed deposit rate is only 1.7%, which can’t keep up with inflation. Instead of letting your money depreciate, consider entering the world of foreign currency investments. But before you start, you must clarify one question: What exactly do you earn from foreign exchange?

Many beginners think buying foreign currency is simply currency exchange, but that’s not the case. Foreign currency investment is like other financial products; returns come from two parts: exchange rate difference and interest rate spread. The exchange rate difference is the profit from currency price movements, while the interest rate spread is the difference between the benchmark interest rates of different countries. For example, with a Taiwan fixed deposit at 2% and a US fixed deposit at 5%, the 3% interest rate gap is your potential profit from holding US dollars.

But there’s a trap—you might earn the interest rate spread but lose due to exchange rate fluctuations. For instance, if you buy USD at 33 TWD and sell at 30 TWD, even with a 5% interest gain, overall you might still incur a loss. This is why understanding the risks of exchange rate volatility is essential before investing in foreign currencies.

Foreign Currency vs. Forex: Do You Really Know the Difference?

These two concepts are often confused, but they have clear distinctions. Foreign currency refers to all currencies other than your domestic currency, such as USD, JPY, AUD, etc. Forex (foreign exchange) is the assets held by a country in foreign currencies, including bank deposits, government bonds, and other international payment instruments.

In simple terms, foreign currency is a commodity, while forex is an asset. Forex trading involves buying and selling foreign currencies, but currency exchange is just one form of forex trading. In practice, investors usually trade foreign currencies directly, which is the core of foreign currency investment.

Essential for Beginners: A Comparison of Three Foreign Currency Investment Methods

To enter the foreign currency investment market, you have three options, each with different risks and returns.

1. Foreign Currency Fixed Deposit — Stable but Less Flexible

This is the most beginner-friendly method and the lowest risk. You need to open a foreign currency account at a bank (available to those over 20), then convert TWD into foreign currency and deposit it to earn fixed deposit interest.

Advantages: safe with no risk. Disadvantages: very low liquidity. If the exchange rate reaches your target but the deposit term isn’t over, early withdrawal will deduct interest. At this point, you might consider the second method.

2. Foreign Currency Funds — Flexible and Moderate

Compared to fixed deposits’ rigidity, foreign currency funds are more suitable for investors needing flexibility. No lock-in, can buy and sell anytime, with returns between savings and fixed deposits. You invest in TWD, and the fund company handles currency exchange, earning from interest income and exchange rate difference.

Common options include money market funds (like USD funds) and currency ETFs (like USD index ETF). Management fees are generally around 0.5-0.6%, and they can be purchased via banks or brokerages.

3. Forex Margin Trading — High Leverage, High Risk, High Return

Designed for investors with some experience. Forex margin trading doesn’t earn interest; profits come solely from exchange rate differences, amplified by leverage. Typical leverage ranges from 50x to 200x, but international regulations recommend keeping leverage below 30x for major currency pairs.

The biggest advantage is 24-hour trading, low entry barriers, T+0 mechanism, and the ability to trade all major currency pairs globally. But leverage also multiplies risks—one wrong move can lead to a margin call or liquidation.

12 Common Foreign Currencies Accessible in Taiwan Banks

Taiwanese investors can access 12 main foreign currencies: USD, AUD, CAD, HKD, GBP, CHF, JPY, EUR, NZD, SGD, ZAR, SEK.

These currencies can be categorized into four groups based on influencing factors. Understanding their characteristics is crucial for choosing which to invest in.

Policy Currencies: USD and EUR

These currencies’ exchange rates are mainly influenced by central bank policies. The Federal Reserve and European Central Bank’s interest rate hikes, cuts, and QE policies directly determine their movements. Loose policies usually lead to currency depreciation, tight policies push rates higher. When investing in these currencies, tracking central bank meetings and policy signals is key.

Safe-Haven Currencies: JPY and CHF

These countries are seen as safe havens due to economic stability and political steadiness. Their interest rates are rarely adjusted and are less correlated with domestic economic conditions. During global turmoil or economic downturns, capital flows into these currencies for safety. Many investors also borrow these currencies for carry trades—borrowing low-interest currencies to invest in high-interest ones, then converting back when the economy recovers.

Commodity Currencies: AUD and CAD

These economies rely heavily on commodity exports. Australia is the world’s largest iron ore exporter; Canada is known for oil exports. When commodity prices rise, exports increase, and currencies appreciate; when prices fall, currencies depreciate. For beginners, these currencies are easier to understand because their price movements tend to follow predictable patterns.

Emerging Market Currencies: RMB and ZAR

Currencies from developing regions often have higher interest rates to attract high-yield investors. But they come with large exchange rate fluctuations, low liquidity, and wide bid-ask spreads. ZAR offers attractive rates but also higher risks, requiring careful assessment.

The principle of choosing currencies is simple: high interest rates are tempting, but stability and international liquidity are equally important. USD, EUR, and AUD, due to their relative stability and liquidity, are the most popular choices among investors.

Major Currency Trends in 2025

The Fed has started cutting rates since September 2024, with a total reduction of 100 bps. In 2025, the Fed experienced five pauses and no hikes until September, when it resumed cutting by 25 bps to a 4.00%-4.25% range. This rate cut was mainly to address softening US labor markets.

As the world’s reserve currency, US policy changes impact the entire forex market. 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%), CHF (3.6%). Movements of these components directly influence investment strategies.

EUR/USD(EUR/USD) is the most traded currency pair globally, reflecting the competition between the US and European economies. With the Fed cutting rates and the ECB holding steady, supported by optimistic economic data, the euro hit a four-year high. The market perceives the ECB’s monetary policy as more independent, making the euro a more stable choice compared to the uncertain US dollar.

USD/JPY(USD/JPY) is a primary tool for carry trades. The Bank of Japan has paused rate hikes to assess US tariffs’ impact, but most economists expect a 25 bps hike by year-end. Divergence in policy expectations has strengthened the outlook for narrowing US-Japan interest rate differentials, likely causing short-term volatility in JPY.

GBP/USD(GBP/USD) has strengthened this year mainly due to a weaker dollar rather than improved UK fundamentals. As the Fed’s policy outlook becomes clearer, the pound faces re-pricing risks. Given the UK’s sluggish economic growth and potential rate cuts, the pound’s upside remains limited.

USD/CHF(USD/CHF) is notable for its safe-haven appeal. Amid US trade and fiscal uncertainties, the Swiss franc’s safe-haven status has increased, with international capital flowing into it, pushing its exchange rate higher. In the medium to long term, US economic slowdown, continued Fed rate cuts, and a generally weaker dollar support Swiss franc appreciation.

Five Major Factors Influencing Exchange Rates

To succeed in foreign currency investment, understanding what drives exchange rate fluctuations is essential. The five key factors are:

Inflation Rate: Countries with low inflation tend to see their currencies appreciate. Slow price increases in goods and services indicate strong currency value retention, attracting foreign investment.

Interest Rate Levels: Rising interest rates mean higher returns on loans, attracting foreign capital and pushing up the currency’s value. This explains why the dollar often strengthens when the Fed hikes rates.

Government Debt: Excessive government debt can undermine foreign investor confidence. When debt risk is perceived to rise, foreign investors may sell bonds, leading to currency depreciation.

Trade Conditions: When export prices rise faster than import prices, a country’s foreign exchange income increases, causing currency appreciation. The opposite leads to depreciation. Commodity currencies are especially sensitive to this.

Political Stability: Countries with stable politics and low risk attract foreign investment, leading to currency appreciation. Political turmoil tends to cause depreciation.

How Can Beginners Profit from Foreign Currency Investment?

With the basics in place, let’s discuss specific ways to make money. The core principle of foreign currency investment is “buy low, sell high,” but the forex market’s unique feature is two-way trading.

Traditional investments are usually one-sided—buy low, sell high. In foreign currency investment, you can also “sell high, buy low.” For example, if you expect EUR/USD to depreciate, you can sell the currency pair first. If EUR indeed depreciates, you can buy back at a lower price to realize a profit.

The specific steps are threefold:

Step 1: Choose the trading target. You need to analyze the fundamentals behind two currencies—policy, interest rates, export products—to decide whether to go long or short. For example, if you expect the US to cut rates while Japan keeps rates steady, you might go long JPY/USD. This is the most critical decision point.

Step 2: Develop a trading strategy. Based on your risk tolerance and experience, set entry and exit points, stop-loss and take-profit levels. Also, consider market risks and transaction costs.

Step 3: Manage your mindset and select a platform. Market volatility can trigger emotions; maintaining rationality is vital. Choose a safe, reliable, low-cost, and feature-rich trading platform.

Five Tips to Steady Your Investment and Avoid Pitfalls

1. Only trade currencies you understand
There are many foreign currencies, and market news is everywhere. Beginners should stick to major currency pairs like USD, JPY, EUR. High trading volume and transparent information make these safer choices.

2. Monitor exchange rate fluctuations constantly
Forex rates change every moment, influenced by markets, economic data, news, etc. Follow international financial news to stay updated on rate movements and policy signals.

3. Diversify to reduce risk
Don’t put all your eggs in one basket. Holding a mix of USD fixed deposits and AUD funds can hedge risks. Once diversified, frequent trading isn’t necessary.

4. Learn to set stop-loss and take-profit orders
One of the main reasons for margin calls is the lack of stop-loss orders. Place automatic stop-loss orders at appropriate levels to prevent large losses. For day trading, limit to 2 trades per day.

5. Timing your entry is crucial
Avoid chasing highs or selling lows. Prepare a trading plan in advance. Once a trend forms (often confirmed on 5-minute or longer charts), enter according to your plan. Different risk preferences may also consider 5-minute, 30-minute, or 2-hour candlestick charts for decision-making.

Final Advice

Any investment strategy is just theory without practice. Using a demo account first is the smartest approach. Demo trading requires no real funds and allows you to test strategies, improve risk management, and build confidence. Only when you are confident should you switch to real trading.

Foreign currency investment is a good way to earn foreign exchange, but only if you have mastered the basics, developed a sound strategy, and can control risks. Wishing you successful investing.