Mastering the Arbitrage Profit Logic | How to Achieve Stable Profits in Foreign Currency Trading

Why the Forex Market is Worth Paying Attention To

In today’s investment landscape, foreign exchange has become the largest financial product by trading volume globally. With over 6 trillion USD traded daily, it far exceeds traditional investment assets like stocks, bonds, and gold. Especially in recent years, adjustments in national monetary policies have made exchange rate fluctuations more frequent, which also means that investors face ample opportunities to profit.

Unlike other investment methods, currency trading not only involves gains from price fluctuations but also offers practical applications in daily life. Whether for traveling abroad, overseas shopping, or international trade, foreign currencies have their practical value, broadening the participant base in the forex market.

What is the Spread, and How Can It Help You Make Money

Spread refers to the difference in exchange rates for the same currency at different times or through different channels. Simply put, it’s the profit made from “buy low, sell high” or “sell high, buy low.”

For example, suppose you buy 1 standard lot (100,000 units) of EUR/USD at an exchange rate of 1.0800, and later close the position when the rate rises to 1.0900. Your profit calculation would be:

Profit = (Closing Price - Opening Price) × Trade Volume = (1.0900 - 1.0800) × 100,000 = 1,000 USD

A mere 100 pip movement in the exchange rate can generate a profit of 1,000 USD. That’s the charm of spread trading.

Comparing Three Ways to Profit from Foreign Currencies

Lowest Risk: Bank Foreign Currency Fixed Deposit

This is the most conservative forex investment method, with low barriers and minimal risk. You simply open a foreign currency account at a bank, convert TWD to foreign currency at the posted exchange rate, and deposit it regularly.

The main return comes from interest rate differentials. For example, Taiwanese investors often choose USD fixed deposits and South African Rand fixed deposits, which offer relatively high interest income. At maturity, if the exchange rate remains stable or appreciates, you earn both interest and exchange gains. Even if the rate depreciates, as long as the decline is less than the interest earned, you still profit.

Warm Tip: Bank fixed deposit buy-sell spreads typically range from 0.3% to 0.47%, which incurs higher costs. Also, early withdrawal forfeits interest, making it less suitable for investors seeking flexible trading.

Moderate Risk: Foreign Currency Funds

This approach combines foreign currencies with other investment tools. Usually, such funds invest in stocks or bonds of specific countries. Investors can profit from both exchange rate fluctuations and the appreciation of the underlying assets, achieving “dual profits.”

For example, if you believe the Japanese Yen will appreciate and think Japanese stocks are undervalued with room to grow, you can buy Yen-denominated Japanese stock funds. This way, you benefit from Yen appreciation and stock price increases simultaneously.

Highest Risk, Highest Return: Forex Margin Trading

Forex margin trading involves contracts with brokers, where investors only need to pay a margin deposit to control a position much larger than their capital—this is called “leverage.”

The advantages of this trading method are obvious:

Leverage amplifies gains: Leverage can range from dozens to hundreds of times, magnifying even tiny exchange rate movements into substantial profits. For example, the USD/JPY pair’s historical trend from 161 Yen per USD to 141 Yen per USD (around August 2023) could yield multiple times the profit when traded with leverage.

Low trading costs: Compared to bank spreads of 0.3%-0.47%, forex platforms often have spreads as low as a few tenths of a pip, sometimes with no commission.

T+0 Two-way Trading: Investors can go long or short simultaneously, with no restrictions on the number of trades per day, offering high flexibility.

Five Practical Forex Trading Tips

1. Range Trading: Stable Oscillation Profits

When exchange rates fluctuate within a fixed range, range trading is most effective. Traders need to identify support and resistance levels and buy near support, sell near resistance.

A classic example is EUR/CHF from 2011 to 2015. After the Swiss National Bank announced it would unconditionally maintain a 1.2000 lower limit, traders continuously traded within the 1.2000-1.2500 range, accumulating steady profits.

Risk Management: Always set stop-loss points at support and resistance levels, as a breakout can lead to significant losses.

2. Trend Trading: Medium to Long-term Strategy Following the Trend

When the exchange rate shows a clear upward or downward trend, trend trading is most effective. This strategy is often used for medium to long-term trades, with trade durations aligned with trend length.

The EUR/USD trend from May 2021 to October 2022 is a typical case. With the Fed aggressively raising interest rates and the European Central Bank remaining cautious, the USD appreciated steadily, allowing investors to profit from the continued USD rise.

Key Point: Once a trend is established, it’s hard to reverse. Stick to your risk-reward setup and set stop-loss accordingly.

3. Day Trading: Capturing Short-term Fluctuations

If you prefer short-term trading, day trading suits you. The key is to monitor major economic data releases and central bank decisions.

Events like US CPI releases, FOMC meetings, or announcements of QE or QT often trigger sharp exchange rate movements. By seizing these moments, you can realize significant gains within 1-2 days.

Trading Discipline: Make quick decisions, avoid hesitation, and prevent short-term trades from turning into long-term losses.

4. Swing Trading: Combining Technical and Fundamental Analysis

Swing trading lies between day trading and trend trading. It requires technical analysis to identify volatile assets and fundamental analysis to catch the right timing for market moves.

Focus on four signals: upward breakout, downward breakdown, trend reversal, and trend retracement.

The event of the Swiss National Bank removing the EUR/CHF 1.2000 floor on January 15, 2015, is a classic downward gap. Traders who anticipated this move reaped huge profits.

Trading Principle: The greater the volatility, the higher the potential profit, but also the higher the risk. Take profits when the trade is favorable.

5. Position Trading: Patience for Long-term Gains

If you dislike frequent trading, position trading is ideal. This strategy relies on macroeconomic analysis, historical trend studies, and fundamental research to identify long-term investment directions.

Investors don’t need to focus on short-term fluctuations—just find suitable low-cost entry points. For example, if you expect the USD to decline long-term, gradually build positions at high levels of the USD Index to lower your average cost.

Strategy Focus: Seek low-cost entry opportunities during exchange rate cycles and hold until your target is reached.

Foreign Currency Trading Schedule

Bank Foreign Currency Trading Hours

Bank operating hours are usually from 9:00 AM to 3:30 PM, closed on weekends and holidays. This limits your trading time.

Forex Margin Trading Hours

Compared to fixed bank hours, forex margin trading is more flexible. The forex market has four main trading sessions:

Sydney Session: GMT+0 22:00-07:00 (Taiwan Time 6:00-15:00)

Tokyo Session: GMT+0 23:00-08:00 (Taiwan Time 7:00-16:00)

London Session: GMT+0 07:00-16:00 (Taiwan Time 15:00-24:00)

New York Session: GMT+0 12:00-21:00 (Taiwan Time 20:00-5:00)

Due to overlapping hours, you can achieve 24-hour trading from Monday to Friday without interruption.

Choosing the Right Forex Investment Method for You

There’s no absolute best way to invest in forex—only the most suitable one for you. Investors with low risk tolerance can choose bank deposits or funds; those with some experience and risk appetite can try margin trading.

Regardless of your choice, understanding the essence of spreads, mastering trading skills, and knowing market hours are prerequisites for success. The forex market offers opportunities to all diligent investors—what matters most is finding a trading rhythm and risk management approach that suits you. Before real trading, it’s recommended to practice with a demo account to gain experience and ultimately develop your own profit system.