It is the world's largest trading market! Master the secret to earning from currency exchange spreads

Why is forex trading worth paying attention to? Simply put, the most traded product in the global financial markets is currency exchange between countries. Compared to stocks, bonds, gold, and other investment products, the daily trading volume of the forex market exceeds 6 trillion USD, offering unparalleled liquidity. More importantly, ordinary people encounter foreign currencies in daily life through travel, overseas shopping, international trade, and more, making participation much more accessible than other investment methods.

The Core of Currency Trading — What is the Spread?

To profit in the forex market, first understand the concept of “spread.” The spread is the difference in exchange rates for the same currency at different times or through different channels. Traders predict future currency exchange rate movements and adopt strategies of “buy low, sell high” or “sell high, buy low” to earn the difference.

How is the spread profit calculated?

The calculation is simple: Profit = (Close Price - Open Price) × Trading Volume

For example, suppose you expect the euro to appreciate against the US dollar, and you buy 1 standard lot (100,000 units) of EUR/USD at 1.0800. When the rate rises to 1.0900 and you close the position, the profit is:

( (1.0900 - 1.0800) ) × 100,000 = $1,000

A mere 100 pip movement can bring a profit of $1,000! This is why currency trading attracts many investors.

Three Main Ways to Profit from the Spread

Depending on risk appetite, investors can choose different forex trading methods.

Method 1: Foreign Currency Bank Fixed Deposit — The Lowest Risk Option

This is the lowest threshold and risk in forex investment. Investors simply open a foreign currency account at a bank, exchange at the bank’s posted rate, and deposit for a fixed term. Upon maturity, they can choose to renew or convert back to local currency.

Returns come from interest rate differentials. For example, Taiwanese investors favor USD fixed deposits due to higher interest rates and broad usage, while South African rand deposits attract those seeking higher yields compared to TWD. As long as the exchange rate remains stable or appreciates after conversion, plus the interest earned, profits can be realized.

Note: Bank fixed deposits mainly earn interest, not spread. They are best in environments with stable bilateral interest rates. If aiming for spread profits, fixed deposits are limited because they cannot be traded flexibly, early withdrawal may incur interest losses, and short-selling is not possible, risking missed opportunities.

Method 2: Foreign Currency Funds — Moderate Risk Allocation

These funds invest in stocks or bonds of specific countries, combining exchange rate fluctuations with asset growth as dual sources of return.

If you are optimistic about yen appreciation and believe Japanese stocks are undervalued, purchasing yen-denominated Japanese stock funds can achieve dual profits — benefiting from yen appreciation (spread) and stock investment gains. This approach has moderate risk and suits investors seeking diversification.

Method 3: Forex Margin Trading — High Yield, High Risk

This is the most aligned with earning from spreads. Traders execute contracts via brokers, only need to pay a margin (usually 5%-10%), and can trade amounts far exceeding their capital using leverage.

Leverage ratios range from dozens to hundreds times. Correct market direction doubles profits; wrong direction can wipe out the principal quickly. This high risk is the reason for its potential high returns, but it also requires careful risk management.

Notably, even without leverage, the bid-ask spread in margin trading is much lower than bank exchange rates. Banks’ spreads can be as high as 0.3%-0.47%, while trading platforms often have spreads below 0.1%, making short-term trading profits surpass traditional bank currency exchange margins even without leverage.

Core Advantages of Forex Margin Trading

The Power of Leverage to Amplify Returns

USD/JPY is one of the most popular trading pairs. For example, in early August last year, the yen surged from 161 to 141 against the dollar. If traders caught this move with appropriate leverage, profits could multiply several times. Small fluctuations amplified by leverage become substantial gains.

Extremely Low Trading Costs

Trading costs mainly include spreads and interest. Bank spreads for TWD/USD can be as high as 0.47%, with others around 0.3%, but EUR/USD spreads on trading platforms can be as low as 0.0082%. This means the same trade costs on platforms are only a fraction of bank rates.

T+0 Two-Way Trading with Unlimited Transactions

Traders can profit from both long and short positions simultaneously. Expecting USD to appreciate? Go long USD/TWD. Expecting TWD to appreciate? Short USD/TWD. No trading day limits, and multiple trades can be executed within the same day, maximizing market opportunities.

In-Depth Analysis of Five Practical Trading Strategies

Range-Bound Trading — Suitable for Consolidating Markets

When exchange rates fluctuate between clear support and resistance levels, range trading is most effective. Traders buy near support and sell near resistance repeatedly.

For example, during 2011-2015, EUR/CHF traded within a range after the Swiss National Bank announced maintaining a 1.2000 lower limit. Traders repeatedly bought low and sold high between 1.2000 and 1.2500. Oscillation indicators like RSI and CCI can serve as buy/sell signals.

Key Tip: Set strict stop-loss points; if the range breaks, losses can be severe.

Trend Following — Capture Medium to Long-Term Direction

When the market shows a clear upward or downward trend, trend trading can generate substantial profits. This strategy is more suitable for medium to long-term positions, with trading periods aligned with trend cycles.

For example, from May 2021 to October 2022, EUR/USD experienced a prolonged decline after the Fed’s rapid rate hikes (up to 100 basis points per hike), while the ECB hesitated to raise rates. The euro bottomed out after 17 months. Investors who grasped this major trend profited handsomely.

Trend trading also requires precise stop-loss placement, with profit targets larger than stop-loss levels to ensure favorable risk-reward ratios.

Insight: Once a trend is established, it’s hard to reverse. Holding firm is the “safe” approach.

Day Trading — Reacting to News Events

Short-term traders’ success depends heavily on reaction speed to news. Interest rate adjustments, currency policies, central bank meetings, economic data releases, and more can trigger volatile market swings.

Key moments like Fed meeting minutes, CPI releases, QE or QT announcements often cause explosive moves. Traders who capitalize on these can achieve significant gains within 1-2 days.

Tip: Make quick decisions, take profits promptly, and avoid letting short-term trades turn into long-term losses.

Swing Trading — Combining Technical and Fundamental Analysis

Swing trading lies between day trading and trend trading, requiring both technical and fundamental analysis. The key is to identify volatile currency pairs and catch signals such as breakouts upward or downward, trend reversals, or retracements.

The January 15, 2015, Swiss National Bank’s removal of the EUR/CHF 1.2000 floor is a classic example of a downward breakout, triggering the famous “Swiss Franc Black Swan” event.

Insight: Swing trading profits from volatility. Larger swings mean higher risk; discipline to take profits when ahead is essential.

Long-Term Position Holding — Time-Saving Strategy

For those unwilling to trade frequently, long-term position holding offers an alternative. Based on macroeconomic factors and historical trends, traders buy and hold for the long term, avoiding constant attention to short-term fluctuations.

Since currencies tend to fluctuate within relatively stable ranges rather than skyrocket or crash, investors can buy at historical lows to reduce risk. For example, the DXY index’s 10-year high is around 114, and the low near 90. Entering at lows can significantly lower risk.

Insight: Accurately predict the major direction of exchange rates and find low-cost entry points within volatility cycles.

Advantages of Currency Trading Compared to Other Investments

High Practicality in Daily Life

Forex is not exclusive to professional investors. Daily activities like traveling abroad, international shopping, and cross-border trade involve currency exchange. This naturally exposes ordinary people to currency value fluctuations, laying a foundation for forex arbitrage or hedging.

Easier Trend Judgment

Compared to stocks and funds, forex price movements tend to be more persistent and clearer. Understanding interest rate policies and monetary policies of two countries allows for rough predictions of exchange rate directions. Short-term trading requires more detailed information, but long-term trend judgment is relatively easier.

Unmatched Market Liquidity

With an average daily trading volume exceeding 6 trillion USD, operating 24 hours globally, the forex market offers high transparency. It’s less susceptible to manipulation by single large players, and trading decisions are more data-driven than guesswork.

Timing for Buying and Selling Currencies

Bank Foreign Currency Trading Hours

Bank foreign currency transactions must be conducted during bank operating hours, generally from 9:00 am to 3:30 pm (varies by bank). No trading on weekends and holidays when banks are closed.

Margin Trading Market Hours

Forex margin trading has no centralized exchange, so no fixed opening or closing times. The market is divided into four main sessions: London, Sydney, Tokyo, and New York. Due to overlapping hours, traders can operate 24/5.

In Taiwan time (GMT+8):

• London: Opens at 3 pm (summer) / 4 pm (winter), closes at 12 am (summer) / 1 am (winter)
• Sydney: Opens at 6 am (summer) / 5 am (winter), closes at 3 pm (summer) / 2 pm (winter)
• Tokyo: Opens at 7 am, closes at 4 pm (year-round)
• New York: Opens at 8 pm (summer) / 9 pm (winter), closes at 5 am / 6 am

Recommendations for Starting Your Currency Investment Journey

There is no single absolute best method for earning spreads; it depends on individual risk tolerance, trading habits, capital size, etc. Bank deposits suit conservative investors, funds for balanced approaches, and margin trading for high-yield seekers.

Beginners can start with low-risk methods to gain experience, gradually building knowledge. Many platforms offer free demo accounts, allowing practice in virtual environments, testing strategies, and verifying ideas before real trading.

After mastering these strategies, continuously observe the market and optimize methods. Opportunities for earning spreads in the forex market will gradually emerge. Patience and discipline are key—view trading as a long-term learning and practice process.