Foreign currency investment basics: Master these tips and even beginners can earn steadily

Looking to start foreign currency investment but don’t know where to begin? You’re not alone. Many investors are both excited and confused about the foreign exchange market. This article will quickly introduce you to the core knowledge of foreign currency investment, helping you develop an investment plan that suits you.

Why Invest in Foreign Currencies?

In the era of low interest rates, simply holding domestic currency yields very little. According to statistics, the average annual interest rate for Taiwan bank fixed deposits is only 1.7%, far below major global economies. In contrast, investing in foreign currencies can provide better asset allocation, with several key advantages:

Risk Diversification and Asset Protection
If all assets are denominated in a single currency, a significant devaluation of the domestic currency can greatly diminish your wealth. History has seen many cases of sharp currency devaluations, causing investors to suffer huge losses. Holding multiple foreign currencies can effectively hedge against exchange rate risks.

High Market Transparency
Participants in foreign currency trading are worldwide, making it difficult for any single entity to manipulate market trends. Compared to other investment products, some may carry risks of artificial manipulation.

Flexible Trading Hours
The forex market operates 24 hours a day, allowing investors to stop losses and exit at any time if prices move unfavorably. This is much more flexible than fixed stock trading hours.

Low Entry Barriers
Opening a foreign currency account is quite convenient. If you’re over 20 and have your ID, you can handle it at a bank without complicated procedures.

The Difference Between Foreign Currencies and Forex: Clarify These Two Concepts

Many beginners easily confuse “foreign currency” and “forex.” Although related, they are not exactly the same.

Foreign Currency specifically refers to all foreign banknotes and coins other than the domestic currency, a concrete form of forex. Investors mainly focus on exchange rate fluctuations between different currencies when buying and selling foreign currencies.

Forex has a broader scope, referring to all assets held by a country expressed in foreign currencies, including bank deposits, government bonds, stocks, and other payment instruments. In short, forex encompasses foreign currency trading, foreign currency payment instruments, and foreign securities.

Therefore, it can be understood as: Forex trading includes foreign currency buying and selling, and foreign currency trading is an important part of forex.

How Does Foreign Currency Generate Returns? Exchange Rate and Interest Rate Differentials

The main sources of returns from foreign currency investment are exchange rate differences and interest rate differentials.

Exchange Rate Difference refers to gains made by capturing currency exchange rate movements. For example, if you buy USD at 33 TWD and sell when it appreciates to 35 TWD, you earn a 2 TWD exchange gain.

Interest Rate Differential comes from differences in benchmark interest rates between countries. Suppose Taiwan’s fixed deposit rate is 2%, and the US is 5%, a 3% difference that could translate into potential profit. If you convert TWD to USD and deposit in a US bank, you can earn higher interest.

But be especially cautious of the trap: earning interest rate differentials but losing on exchange rates. You might earn 5% interest on USD due to interest rate differences, but if the USD depreciates against TWD by more than 5%, your overall return becomes negative. This highlights the importance of choosing the right entry and exit timing strategies.

Before starting foreign currency investment, clearly define your goals: Are you seeking stable interest income, or aiming to profit from short-term exchange rate fluctuations? Different goals require different strategies.

Comparing the Three Main Foreign Currency Investment Methods

Taiwanese investors typically have three main ways to invest in foreign currencies, each with pros and cons:

Foreign Currency Fixed Deposit: The Most Stable Entry-Level Choice

Fixed deposits are the simplest and lowest-risk way to invest in foreign currencies. After opening a foreign currency account, deposit funds into the bank and enjoy periodic interest. The advantage is stable returns and low risk; the downside is poor liquidity. Early withdrawal may incur some interest penalties.

If you want to maintain the safety of fixed deposits while keeping funds flexible, foreign currency funds are a better choice.

Foreign Currency Funds: Balancing Flexibility and Returns

Foreign currency funds do not require a fixed term; investors can buy and sell at any time. The fund company handles currency exchanges, so investors don’t need to operate foreign currency accounts themselves. Common types include money market funds and foreign currency ETFs.

For example, a USD money market fund mainly invests in USD-related products, with management and custody fees around 0.5%; a USD ETF tracks the USD index with a total expense ratio of about 0.6%. The interest rates of these funds are usually between savings accounts and fixed deposits, offering good flexibility.

Forex Margin Trading: High Leverage, High Risk, High Return

Forex margin trading is preferred by professional investors. Leverage amplifies gains, allowing traders to conduct large transactions with a small amount of margin. Trading operates 24/7 with T+0 mechanism (buy and sell on the same day), making it highly flexible.

However, high leverage comes with high risk. Beginners should start with lower leverage (preferably no more than 30x) and strictly set stop-loss points to prevent margin calls.

Which Foreign Currencies Do Taiwanese People Favor?

Taiwanese banks generally offer 12 major foreign currencies for investors, including USD, AUD, CAD, HKD, GBP, CHF, JPY, EUR, NZD, SGD, ZAR, and SEK.

These currencies can be categorized based on their main drivers of exchange rate movements:

Policy Currencies: USD and EUR
These are mainly influenced by central bank policies. When central banks adopt easing policies, exchange rates tend to fall; tightening policies usually cause appreciation. Investors should closely monitor central bank rate decisions.

Hedging Currencies: JPY and CHF
These economies are developed and politically stable, with central banks rarely adjusting interest rates actively. During global economic risks, investors tend to buy these currencies for hedging. Many professional traders borrow in JPY or CHF for arbitrage, then convert back after the economy recovers, earning both exchange rate and interest rate gains.

Commodity Currencies: AUD and CAD
These are highly correlated with commodity prices. Australia is the largest exporter of iron ore; when iron ore prices rise, international buyers need more AUD, causing appreciation; vice versa, it depreciates. Due to their relatively regular trends, commodity currencies are easier for beginners to trade.

Emerging Market Currencies: RMB, ZAR, etc.
These often have higher interest rates, attracting high-yield investors. However, due to political instability or lower liquidity, their exchange rates can be highly volatile, with larger bid-ask spreads. Risks and returns coexist, so investors should be cautious.

Investment Tips for Foreign Currencies: Besides comparing interest rates, consider exchange rate stability and international liquidity. Mainstream currencies like USD, EUR, and AUD are more stable and suitable for most investors. ZAR, while offering attractive interest rates, is more volatile and less liquid, making it less suitable for beginners.

Five Major Factors Influencing Exchange Rate Fluctuations

To profit from foreign currency investments, you must understand why exchange rates fluctuate. The main factors include:

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

Interest Rate Levels
Higher interest rates tend to boost currency value. Elevated rates offer better returns for foreign investors, attracting international capital inflows and strengthening the currency.

Government Debt
High government debt makes a country less attractive to foreign investors due to concerns over repayment ability. If markets expect debt risks to rise, foreign capital may sell off assets, causing currency depreciation.

Trade Conditions
When a country’s export prices increase more than import prices, trade conditions improve, bringing in more foreign exchange income and boosting the currency.

Political Stability
Stable political environments and clear economic policies attract foreign investment. Conversely, political risks can lead to capital outflows and currency depreciation.

How Can Beginners Profit from Buying and Selling Foreign Currencies?

After understanding the factors influencing exchange rates, the next step is practical operation. Foreign currency investment mainly employs two strategies: “buy low, sell high” and “sell high, buy low.”

Traditional one-way investment only allows going long (buy low, sell high), but the forex market permits two-way trading. This means you can also short sell (sell high, buy low): if you expect a currency to depreciate, sell it first, then buy back after it falls, pocketing the difference.

Successful foreign currency investors usually follow these steps:

1. Choose Trading Targets
Deeply understand the two currencies you plan to go long or short on, analyzing their respective central bank policies, interest rate trends, major export commodities, and other fundamental factors. Decide whether to go long (bullish) or short (bearish).

2. Develop a Clear Trading Plan
Based on your risk tolerance and experience level, set clear entry points, exit points, stop-loss, and take-profit levels. Your strategy should include when to enter, when to exit, and your maximum acceptable loss.

3. Strictly Execute the Plan
Avoid changing decisions due to market volatility. Trade according to your pre-set plan, avoiding chasing highs or cutting losses prematurely. Waiting for a clear trend formation (usually confirmed over 5 minutes or more) is recommended.

4. Prioritize Risk Management
Stop-loss placement is crucial. For example, in day trading, establish a long position near support levels with a stop-loss order. If the price breaks support, automatically exit; if it continues upward, wait for signs of trend weakening before closing. Limit daily trades to about 2 times.

5. Maintain Psychological Stability
Market volatility is normal. Investors need continuous learning and practical experience, avoiding emotional decisions based on short-term fluctuations.

Latest Trends of Main Currency Pairs

EUR/USD(EUR/USD)
As the most traded currency pair globally, EUR/USD influences the entire forex market. Recently, the Fed has cut interest rates while the European Central Bank maintains its policy, strengthening the euro. Market analysis suggests increased policy uncertainty raises dollar risk, while the ECB’s independence and policy stability attract capital inflows into the euro.

USD/JPY(USD/JPY)
Carry trade is common with JPY. Diverging policies—Fed leaning easing, BOJ considering rate hikes—are prompting reassessment of the US-Japan interest rate differential. Domestic political uncertainties in Japan also impact the exchange rate, with short-term movements likely to be range-bound.

GBP/USD(GBP/USD)
Recent GBP strength mainly results from a weak dollar rather than fundamental improvements in the UK economy. As the Fed’s policy outlook becomes clearer, markets may reprice GBP. Given the UK’s sluggish economic growth and rate cut expectations, GBP may remain in a range.

USD/CHF(USD/CHF)
The Swiss franc is a popular safe-haven asset. Amid US trade and fiscal issues, the CHF attracts capital inflows, performing strongly. In the medium to long term, US economic slowdown, Fed rate cuts, and a generally weaker dollar favor the CHF.

Practical Tips for Foreign Currency Investment

Invest Only in Familiar Currencies
Beginners should focus on the most traded major currency pairs (USD, JPY, EUR) rather than obscure currencies. Deep research on a few currencies helps better grasp the market.

Continuously Follow Market News
Foreign exchange rates are constantly affected by economic data, central bank decisions, geopolitical events, etc. Regularly read international financial news sites (Bloomberg, CNBC, Yahoo Finance) to stay informed.

Use Diversification Strategies
Avoid concentrating all funds in a single currency or instrument. For example, holding both USD fixed deposits and AUD funds can hedge risks and reduce the need for frequent trading.

Master Stop-Loss and Take-Profit
This is the most critical skill in forex trading. Set reasonable stop-loss points to prevent large losses, and stop-profit points to lock in gains. Don’t hesitate to execute your plan just because hope remains.

Time Your Entry Well
Avoid chasing highs or selling lows impulsively. Prepare your trading plan in advance, and execute when the timing aligns. Waiting for a clear trend formation is best, which can be based on 5-minute, 30-minute, or 120-minute charts according to your preference.

Practice with Demo Accounts
Any theoretical knowledge is useless without practice. Many trading platforms offer free demo accounts to test strategies, assess risk management, and gain experience without risking real money.

Summary

Foreign currency investment is not an unattainable privilege; it’s an asset allocation method accessible to everyone. From stable fixed deposits to flexible funds and high-leverage margin trading, investors with different risk preferences can find suitable options.

The key is to thoroughly understand the market, assess your risk tolerance, develop a clear investment plan, and execute it strictly. Keep learning and accumulating experience. With proper methods, foreign currency investment can bring substantial returns to your assets.

By adopting a long-term perspective, investing in foreign currencies can help hedge against domestic currency depreciation, diversify assets, and seek better returns in a low-interest environment.