Foreign currency trading for profit from exchange rate differences | Which trading method should you choose?

In the global financial markets, the daily trading volume of foreign exchange reaches trillions of dollars, far surpassing other investment assets such as stocks, bonds, and gold. In recent years, currency fluctuations have become more frequent, and exchange rates in mature markets have experienced dramatic changes, bringing unprecedented opportunities for ordinary investors. At the same time, the practicality of foreign currencies has expanded their audience—whether for traveling abroad, overseas shopping, or international trade—necessitating currency exchange operations, thus lowering the barrier to participate in the foreign currency market.

If you are interested in buying and selling foreign currencies but lack practical experience, this article will systematically analyze the principles of exchange rate arbitrage, various methods, practical techniques, and the timing strategies for different trading approaches to help you find the investment path most suitable for you.

The Core Logic of Buying and Selling Foreign Currencies: What is the Exchange Rate Spread?

The fundamental goal of buying and selling foreign currencies is: to profit from the exchange rate spread.

The exchange rate spread refers to the difference in the exchange prices of the same currency at different times or through different trading channels. Investors profit by predicting future currency exchange trends and adopting strategies of “buy low, sell high” or “sell high, buy low.” This is the most common and intuitive form of retail foreign currency trading.

How is the profit from the exchange rate spread calculated?

The formula is simple: Profit from exchange rate spread = (Close Price - Open Price) × Trading Volume

For example, suppose you predict the euro will appreciate against the US dollar, and you buy 1 standard lot (100,000 units) of EUR/USD at an exchange rate of 1.0800. Later, the rate rises as expected to 1.0900, and you close the position in time.

Your profit from the spread is: (1.0900 - 1.0800) × 100,000 = $1,000

A mere 100 pips fluctuation in the exchange rate can bring substantial profit to investors. This leverage effect is precisely what makes foreign exchange trading attractive.

The Various Methods of Buying and Selling Foreign Currencies

Depending on risk levels and expected returns, foreign currency trading mainly falls into three categories:

The first: Bank Foreign Currency Fixed Deposits (Low Risk)

This is the lowest risk and lowest barrier method of foreign currency trading. Investors only need to open a foreign currency account at a bank, exchange currency based on the bank’s published rate, and then choose a fixed deposit.

Taiwanese investors most commonly choose USD fixed deposits (high interest, versatile use) or South African Rand fixed deposits (more advantageous interest rates compared to TWD). The process is straightforward: convert TWD to foreign currency at the bank app or counter at the current rate, set the fixed deposit term, and upon maturity, choose to renew or convert back to TWD.

Income mechanism: The main income from foreign currency fixed deposits comes from interest, not exchange rate spread. As long as the foreign exchange rate against TWD remains stable or appreciates, profits can be realized. Even if the rate depreciates, as long as the depreciation is less than the interest earned, profit is still possible.

Note: Currently, the US is in a rate-cut cycle, and USD/TWD may face depreciation risk. If you want to focus on earning from the spread rather than interest, bank fixed deposits are less flexible, as early withdrawal may result in loss of interest and no ability to short sell.

The second: Foreign Currency Funds (Medium Risk)

These products combine currency investment with financial instruments, usually investing in bonds or stocks of specific countries, thus achieving dual returns: profits from exchange rate fluctuations and from the appreciation of the investment assets themselves.

For example, if you are optimistic about the yen’s appreciation potential and believe that Japanese stocks are undervalued with room to rise, purchasing yen-denominated Japanese stock funds allows you to benefit from both yen appreciation and stock price increases, achieving a “two birds with one stone” investment effect.

The third: Forex Margin Trading (High Risk)

Forex margin trading involves contracts provided by brokers and is a high-risk, high-reward trading method. Investors do not need to hold physical currency but only pay a certain margin (usually 1%-10%) to conduct large trades exceeding the margin amount.

Reasons for high risk:

• Built-in leverage, with multiples from dozens to hundreds
• Short-term speculative trading with high volatility
• Correct judgment can multiply profits, incorrect judgment can quickly wipe out capital

Despite the high risk, this high volatility also offers the greatest profit potential.

The Core Advantages of Forex Margin Trading

Leverage amplifies returns

The forex market typically offers leverage from dozens to hundreds of times, so even small exchange rate movements can be magnified into substantial gains.

For example, in USD/JPY, if the yen suddenly appreciates from 161 to 141 per dollar, investors using leverage can realize significant profits by catching this move.

Lower transaction costs than banks

Main costs in forex margin trading include spread (difference between bid and ask prices) and interest (overnight fees).

In Taiwan, the USD/TWD spread can be as high as 0.3%-0.47%, whereas forex trading platforms often have spreads below 0.01% and generally do not charge commissions. This means that even without leverage, short-term buy and sell operations using forex margin can yield higher net returns.

T+0 Two-way trading mechanism

Forex margin trading supports unlimited intra-day trading, allowing investors to profit from both long positions (buy USD expecting appreciation) and short positions (sell USD expecting depreciation). This two-way mechanism greatly expands profit opportunities.

Five Practical Techniques for Buying and Selling Foreign Currencies

Technique 1: Range Trading

When exchange rates fluctuate within a certain price range, investors can buy at support levels and sell at resistance levels, repeatedly executing high sell and low buy operations.

Classic example: Between 2011-2015, the Swiss National Bank announced maintaining a lower limit of 1.2000 for EUR/CHF, leading many investors to continuously trade within the 1.2000-1.2500 range.

Key points: Use oscillation indicators like RSI or CCI to identify buy/sell signals, and set strict stop-loss points at the range boundaries. Once the range is broken, losses can be severe, so stop-loss execution must be strict.

Technique 2: Trend Trading

When exchange rates show strong upward or downward trends, investors should follow the trend. Trend trading usually lasts medium to long term, with trading duration depending on the trend length.

Example: From May 2021, the Fed’s persistent rate hikes and the European Central Bank’s (ECB) inaction led to large bets on USD appreciation, causing EUR/USD to decline from May 2021 until bottoming out in October 2022.

Key insight: Once a trend is established, it rarely reverses easily. The beauty of trend trading lies in the “stability”—if the judgment is correct, profits can be sustained along the trend.

Technique 3: Day Trading

For short-term traders, day trading is suitable. In this strategy, news and data releases are the most critical information sources. Rate decisions, economic data, and central bank policy statements often trigger sudden exchange rate movements.

For example, during 2021-2022, the Fed implemented the fastest rate hikes in nearly 30 years, with a single hike of 4 basis points (100 basis points), pushing the dollar higher. By capturing each Fed decision timing, investors can achieve significant gains within 1-2 days.

Key insight: Short-term trading requires quick decision-making—“cut the knot quickly”—and avoiding prolonged positions, as long positions may turn into long-term losses.

Technique 4: Swing Trading

Swing trading lies between day trading and trend trading, combining technical and fundamental analysis. Investors need to identify assets with high volatility and look for four key signals: breakout upward, breakdown downward, trend reversal, and trend retracement.

Classic example: On January 15, 2015, the Swiss National Bank announced the removal of the EUR/CHF 1.2000 floor, causing the famous Swiss franc “black swan” event. This was a typical downward break signal.

Key points: Swing trading profits from volatility itself, but larger volatility entails higher risk. Investors must “take profits when the time is right” and avoid greed.

Technique 5: Position Trading

This is a long-term holding strategy suitable for investors who dislike frequent trading. Position traders do not focus heavily on short-term news or fluctuations but rely on macroeconomic factors, historical trends, and fundamental analysis to determine the overall direction.

Key to risk reduction: Enter at lower-cost points. Since currencies do not rise or fall infinitely or to zero but fluctuate within certain ranges, investors can enter near historical lows to reduce entry costs and enhance risk resilience.

For example, the US dollar index peaked around 114 in the past decade. If an investor expects the dollar to continue falling due to economic recession, they can gradually build positions near the lows.

Key insight: Grasp the long-term direction of exchange rates and look for low-cost entry opportunities within fluctuation cycles.

Why Choose Foreign Currency Trading?

Advantage 1: Multiple Uses

Foreign currency trading is not only an investment tool but also a daily necessity. Whether for traveling abroad, overseas shopping, international trade, or cross-border investment, currency exchange is required. Understanding the patterns of exchange rate fluctuations in different countries can prepare for practical needs and uncover arbitrage opportunities. For example, exchanging yen when the rate is low can prepare funds for future travel and enable yen carry trade.

Advantage 2: Easier to Grasp the Big Picture

Compared to stocks and funds, the trends of foreign exchange prices tend to be more persistent and clear. Investors only need to understand the relevant countries’ interest rate policies and monetary policies to roughly predict exchange rate movements.

For short-term and leveraged trading, more detailed information is necessary, such as the release schedule of the US Consumer Price Index (CPI), Federal Open Market Committee (FOMC) meeting times, and the directions of quantitative easing (QE) or tightening (QT). These are key moments that can trigger sharp exchange rate fluctuations.

Advantage 3: Extremely High Liquidity

The forex market is the largest financial market globally, with a daily trading volume exceeding 6 trillion USD. Covering multiple time zones worldwide, the forex market operates nearly 24 hours a day. The enormous trading volume makes it difficult for major players to manipulate the market, resulting in high transparency and decision-making based on real data rather than speculation.

The Best Times to Buy and Sell Foreign Currencies

Bank Foreign Currency Trading Hours

If you choose to trade foreign currencies through banks, operations must be within bank business hours, usually from 9:00 AM to 3:30 PM (may vary by bank). On weekends and holidays, banks are closed, and foreign currency trading is unavailable.

Forex Margin Trading Hours

Forex margin trading does not have a centralized exchange, so there are no fixed opening or closing times. The market is divided into four main trading sessions: Sydney, Tokyo, London, and New York. Due to overlapping hours, investors can trade 24 hours a day from Monday to Friday.

Different trading sessions have distinct market characteristics. Investors can choose the most active trading times based on their strategies and time zones.

Summary

Buying and selling foreign currencies to profit from exchange rate spreads offers diverse methods, suitable for different investor personalities and risk tolerances. From low-risk bank fixed deposits to high-yield margin trading, and five practical trading techniques, each has its applicable scenarios.

The key to choosing foreign currency trading is not about “which method is best,” but about finding the most suitable investment rhythm. Beginners are advised to start with bank deposits, then gradually progress to funds or margin trading. Regardless of the path chosen, in-depth market research, strict risk management, and patient experience accumulation are the foundations of steady profits. The foreign exchange market is full of opportunities—by diligently studying, you can always find your own way to make money.