Foreign currency investment from scratch: Unveiling the core logic and practical skills for making money by buying foreign currencies

Can foreign currency investment really make money? This is a common question among many beginners. The answer is yes, but the premise is that you need to understand market rules, choose the right investment methods, and manage risks. This article will delve into the underlying logic of foreign currency investment to help you find a profit-making path that suits you.

The essence of foreign currency investment: exchange rate differences and interest rate spreads

Many people complicate foreign currency investment, but the core is quite simple—earning from exchange rate differences and interest rate spreads.

Exchange rate difference refers to the profit generated by changes in currency exchange ratios. For example, you buy 1 USD with 33 TWD, and later USD appreciates, so you sell 1 USD for 35 TWD. The difference between the buy and sell rates is your profit.

Interest rate spread is the difference in benchmark interest rates between countries. For instance, Taiwan’s fixed deposit rate is about 2%, while the US has 5%. This 3% gap is the extra return you can earn when holding USD.

But here’s a trap: You might earn interest, but lose due to unfavorable exchange rate movements. Suppose you hold USD and earn 5% interest, but the USD depreciates by 10%, resulting in a net loss. This is a typical case of “earning interest spread but losing on exchange rate.”

Therefore, before starting to invest, you must ask yourself: Am I aiming to accumulate slowly through interest spreads, or to profit quickly from short-term exchange rate fluctuations? The two strategies require completely different knowledge frameworks and risk tolerances.

Three ways to buy foreign currency: balancing risk and return

In Taiwan, there are mainly three ways to invest in foreign currencies, each with its pros and cons:

Foreign currency fixed deposit—The safest choice

This is the most common option for beginners. You need to open a foreign currency account at a bank and then exchange TWD for foreign currency to deposit. The process is simple—just bring your ID if you are over 20 years old.

Advantages include safety and reliability, backed by banks, with no risk of losing money. Disadvantages are poor liquidity—if you want to terminate early, the bank will deduct interest. Also, the fixed deposit interest rate is locked in during the term, so you cannot flexibly respond to market changes.

Suitable for: risk-averse investors seeking stable interest income.

Foreign currency funds—Flexibility and returns combined

Foreign currency funds include money market funds and currency ETFs. You can invest directly with TWD, and the fund company handles currency exchange. You can buy and sell anytime, without worrying about liquidity issues.

Interest rates are usually between savings and fixed deposits, with management fees around 0.5%–0.6%. This option is especially suitable for those who want more operational flexibility but do not want to bear high risks.

Suitable for: investors with some experience who want to retain flexible adjustment options.

Forex margin trading—High return, high risk game

Forex margin trading essentially involves predicting and betting on exchange rate movements. You only need to deposit a small margin and can leverage to amplify trading size, typically with leverage between 50× and 200×.

This market operates 24 hours, has low transaction costs, and a low entry barrier. But because of leverage, losses are also magnified—an incorrect prediction can lead to loss of principal.

Suitable for: experienced traders who can bear risks and have discipline.

The logic of categorizing currencies: choosing the right currency for more effective results

Taiwan banks usually offer about 12 currencies for investment, including USD, EUR, JPY, AUD, CAD, GBP, CHF, etc. These currencies can be divided into four main categories:

Policy currencies (USD, EUR)

These currencies’ movements mainly depend on central bank monetary policies. When interest rates are cut, they depreciate; when raised, they appreciate. The key to investing in these currencies is to constantly monitor central bank meetings, as any policy signals immediately reflect in the exchange rate.

Safe-haven currencies (JPY, CHF)

These two countries have stable political situations and developed economies, regarded as safe-haven assets. When global tensions or economic uncertainties rise, capital flows into these currencies. Holding safe-haven currencies offers high stability but limited appreciation potential.

Commodity currencies (AUD, CAD)

These countries’ economies heavily depend on commodity exports. Australia is a major iron ore exporter, and Canada is a petroleum exporter. When commodity prices rise, these currencies appreciate; when prices fall, they depreciate. For beginners, commodity currencies are relatively easier to understand because their movements are clearly influenced by observable factors.

Emerging market currencies (CNY, ZAR)

These currencies often have high interest rates, attracting investors seeking high interest spreads. However, they also carry higher political and economic risks, with more volatile exchange rates and larger bid-ask spreads. Beginners should be cautious—don’t blindly chase high interest rates without considering exchange rate risks.

Overall, for beginners, safe-haven currencies are stable, commodity currencies are easier to predict, and combining these two is most suitable for entry. The USD, as the world’s reserve currency, remains the central focus of foreign currency investments.

The investment logic of major currency pairs

Understanding the interaction between currency pairs is crucial. Here are the four main currency pairs in the current market and their investment logic:

EUR/USD (Euro to US Dollar)

This is the most traded currency pair globally, involving the two largest economies. Even small fluctuations can impact the entire forex market. When the Fed cuts interest rates and the European Central Bank maintains rates, the euro tends to appreciate. Monitoring both central banks’ policies is essential.

USD/JPY (US Dollar to Japanese Yen)

The yen is one of the most common tools for carry trades—investors borrow low-interest yen to invest in higher-yield markets, earning the interest spread. When the interest rate gap narrows (e.g., the Fed cuts rates, Bank of Japan raises rates), this pair tends to weaken.

GBP/USD (British Pound to US Dollar)

In recent years, the GBP’s movements have been mainly driven by USD weakness rather than UK economic improvement. As the Fed’s policies become clearer, the market’s valuation of GBP may adjust, and the pound may fluctuate within a range in the short term.

USD/CHF (US Dollar to Swiss Franc)

The Swiss franc is a recognized safe-haven asset. When global economic uncertainty or trade tensions increase, capital flows into CHF, causing it to appreciate. In the medium to long term, if the US economy continues to slow and the Fed keeps cutting rates, the safe-haven value of CHF will become more prominent.

Five major factors influencing exchange rates

To make more accurate judgments when buying foreign currency, you must understand what drives exchange rate fluctuations:

1. Inflation rate

Countries with low inflation tend to see their currencies appreciate because low inflation maintains purchasing power, encouraging investment. Conversely, high inflation countries’ currencies tend to depreciate.

2. Interest rate levels

High interest rates attract foreign capital seeking higher returns, pushing up the currency’s value. This explains why the USD often strengthens when the Fed raises rates.

3. Government debt

Countries with high government debt face risks of capital outflows. If foreign investors anticipate a fiscal crisis, they may sell bonds and currencies, causing exchange rates to fall.

4. Trade conditions

When a country’s export prices rise and import prices fall, trade conditions improve, increasing foreign exchange income and causing currency appreciation. The opposite also applies.

5. Political stability

Countries with low political risk and transparent policies attract more foreign investment, leading to currency appreciation. Political instability and policy uncertainty tend to cause depreciation.

How should beginners start buying foreign currency?

Having understood the theory, now let’s discuss practical steps. If you decide to use forex margin trading for short-term gains, here are the core steps:

Step 1: Choose your trading target

Not all currency pairs are worth trading. As a beginner, focus on the most traded, stable pairs. Study the economic logic behind your chosen pairs—what are the central bank policies, interest rate differentials, recent economic data?

For example, if you anticipate the Fed will cut rates this year while the Bank of Japan remains stable, you might establish a short USD/JPY position. But this decision relies on your understanding of the interest rate differential logic.

Step 2: Develop a trading plan

Never trade impulsively. Before placing an order, clarify three elements: entry point, stop-loss, take-profit. Entry should be based on a trend that has already begun to form, not chasing highs blindly. Set stop-loss within your risk tolerance. Take-profit should balance risk and reward.

Step 3: Control leverage

Leverage is a double-edged sword. While it can amplify gains, it also magnifies losses. Regulatory guidelines suggest leverage for major currency pairs should be below 30×. For beginners, it’s recommended to start with 5–10× leverage for practice, and only increase once trading discipline is established.

Step 4: Maintain a stable mindset

Exchange rates fluctuate constantly. Watching the screen can trigger emotional reactions. But professional traders understand that discipline is 100 times more important than intuition. Stick to your plan and avoid changing your strategy due to short-term volatility.

Five essential rules for beginners

1. Never trade currencies you don’t understand

There are many foreign currencies, but the most traded and easiest to learn are USD, JPY, and EUR. Focus on familiar assets and avoid being tempted by high interest rates of obscure currencies.

2. Constantly monitor exchange rate movements

Foreign currency investment is not a “buy and hold” game. Regularly follow international financial news, central bank meeting minutes, and economic data releases. Set reminders for key meetings and data to avoid missing critical information.

3. Diversify your portfolio

Don’t put all your funds into one currency. Holding a mix—such as USD fixed deposit, AUD fund, CHF—can buffer against unexpected currency fluctuations.

4. Learn to use stop-loss and take-profit

These are your last lines of defense to protect capital. Especially when trading with leverage, setting stop-loss points is crucial. When the price hits your stop-loss, the system will automatically close the position, preventing further losses.

5. Accurately time your entries

“Buy low, sell high” is ideal, but hard to execute perfectly. A more practical approach is to wait until a trend has formed before entering. Usually, a trend takes more than 5 minutes to establish. Once confirmed, you can build a position based on that. Entering too early before a trend forms often results in being caught in a false move.

Why is foreign currency investment worth your attention?

Low barrier to entry

Opening a foreign currency account is almost effortless—done via bank apps. Investment amounts are flexible, from small to large.

Risk diversification

If all your assets are in TWD, a depreciation of TWD reduces your wealth. Holding multiple currencies effectively hedges exchange rate risks. Historical currency crises in Ukraine, Russia, and others show that those who pre-allocated foreign currencies avoided significant wealth loss.

Market fairness

The forex market is one of the largest markets globally, with daily trading volume reaching trillions of dollars. Its enormous scale makes manipulation by individual participants very difficult, more so than stock markets.

24-hour trading

Unlike stock markets with fixed hours, forex operates around the clock. If your market prediction is wrong, you can stop loss at any time without waiting for the market to open.

Conclusion

Investing in foreign currency is not difficult to start, but doing it well is challenging. The key is to truly understand the logic behind exchange rate fluctuations, rather than blindly following trends. Choosing the right investment method, understanding currency characteristics, establishing strict risk management, and maintaining a stable mindset—mastering these four points will put you ahead of most beginners.

My final advice: start with small amounts, gain experience in real markets, and only consider increasing your investment once your trading discipline is mature. There are no deep secrets in foreign currency investment; it’s just a repetitive process of learning, testing, and improving.