Forex Market Profit Guide: From Spread Calculation Formula to Practical Trading Strategies

Why Invest in Foreign Currencies?

In the global financial markets, the most traded product is not stocks, bonds, or gold, but foreign exchange trading. The daily trading volume of the global forex market exceeds $6 trillion, far surpassing other financial products. In recent years, frequent adjustments in national monetary policies and increased volatility in mature market currencies have brought unprecedented opportunities for investors.

The advantages of investing in foreign currencies are broadly applicable, highly liquid, and trend-clarity. Whether for traveling abroad, overseas shopping, or international trade, most people have been exposed to forex. For investors who carefully study monetary policies and economic fundamentals, currency fluctuations are relatively easier to grasp, especially when understanding central bank policy directions of various countries.

What Do You Earn from Buying and Selling Foreign Currencies? Understanding the Core of the Spread

Investing in foreign currencies essentially means earning the spread—the difference in exchange rates for the same currency at different times or through different channels. Retail investors predict the trend of currency pairs’ exchange rates and adopt strategies like “buy low and sell high” or “sell high and buy low” to profit from the price difference.

Spread Calculation Formula

To calculate the profit from a specific trade, use the following formula:

Profit = (Close Price - Open Price) × Trade Volume

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

Based on the spread calculation formula: (1.0900 - 1.0800) × 100,000 = $1,000 profit

A 100-pip movement results in a $1,000 gain, which is the main reason why forex trading attracts investors.

The Three Main Ways to Buy and Sell Foreign Currencies

Method 1: Bank Foreign Currency Fixed Deposit (Low Risk)

Bank fixed deposits are the most conservative way to invest in forex, with the lowest threshold and risk. Investors only need to open a foreign currency account at the bank, convert TWD to foreign currency (such as USD or ZAR) at the posted exchange rate, and then make a fixed-term deposit.

This method mainly earns interest income rather than the spread. Many banks in Taiwan offer short-term high-interest fixed deposit programs, allowing investors to enjoy the interest rate differences of two markets simultaneously. However, note that bank buy-sell spreads are generally larger (0.3%-0.47%), and fixed deposits cannot be traded flexibly during the term.

Suitable for: Conservative investors, those seeking stable returns

Method 2: Foreign Currency Funds (Medium Risk)

Foreign currency funds combine exchange rate fluctuations with the returns of investment targets. These funds typically invest in bonds or stocks of specific countries, allowing investors to profit from currency appreciation/depreciation as well as asset value growth.

For example, purchasing a JPY-denominated Japanese stock fund. If the yen appreciates and Japanese stocks rise, investors can realize dual profits. This approach has moderate risk compared to pure currency trading but offers greater profit potential.

Suitable for: Investors seeking a balance of risk and return

Method 3: Forex Margin Trading (High Risk, High Return)

Forex margin trading is conducted through broker platforms, where investors only need to pay a certain margin (deposit) to execute large trades far exceeding their capital. This is the most flexible and also the riskiest method.

Due to leverage, forex margin trading can amplify small exchange rate movements by dozens or even hundreds of times. For example, with USD/JPY, a leverage of 200x can be used on professional platforms. In early August 2022, if an investor successfully capitalized on the yen’s sharp rise (from 161 yen per dollar to 141), the profit with leverage could be multiple times larger.

Compared to bank spreads of 0.3%-0.47%, professional trading platforms often have spreads below 0.008%, significantly reducing trading costs.

Suitable for: Experienced traders with strong risk tolerance

Practical Analysis of Five Major Forex Trading Strategies

Range Trading

When exchange rates fluctuate within a certain range without a clear trend, range trading is most effective. Traders need to identify support and resistance levels and buy low/sell high at key points.

Classic example: Between 2011-2015, the Swiss National Bank announced to maintain the EUR/CHF lower limit at 1.2000. Many investors repeatedly traded within the 1.2000-1.2500 range, creating stable profit opportunities.

Use oscillators like Relative Strength Index (RSI) or Commodity Channel Index (CCI) to find buy/sell signals, and set stop-losses at the boundaries to control risk.

Tip: Breakouts from the range often lead to heavy losses; strict stop-loss is essential.

Trend Trading

When the exchange rate exhibits a strong one-sided trend, trend trading is most effective. These trades usually last longer, from weeks to months.

Case study: From May 2021 to October 2022, the US Federal Reserve aggressively raised interest rates, while the European Central Bank hesitated. The market was bearish on the euro, and EUR/USD maintained a downward trend for 17 months.

Trend trading requires ensuring a favorable risk-reward ratio and setting reasonable stop-loss distances, with clear profit targets larger than stop-loss ranges.

Tip: Once a trend is established, it tends to be stable; following the trend is often easier than predicting reversals.

Day Trading

Preferred by short-term investors. The key to day trading is capturing news-driven movements. When central banks announce rate decisions, release economic data (like CPI), or implement quantitative easing/tightening, the forex market can experience intense volatility.

For example, the Fed raised interest rates at every FOMC meeting in 2021-2022, with hikes up to 100 bps, marking the fastest rate hikes in 30 years. Accurately timing these events can yield significant gains within 1-2 days.

Tip: Enter and exit quickly, avoid overnight positions to reduce risk. Short-term opportunities are fleeting; decisive action is crucial.

Swing Trading

A medium-term strategy between day trading and trend trading. Swing trading combines technical and fundamental analysis to identify four key signals: upward breakout, downward breakdown, trend reversal, and retracement.

Classic example: On January 15, 2015, the Swiss National Bank suddenly announced to remove the EUR/CHF 1.2000 floor, causing market turmoil. Investors who recognized this breakout could profit from the downward move.

Tip: Larger volatility offers more opportunities but also higher risks. Take profits when the opportunity arises.

Position Trading

A long-term holding strategy suitable for investors who prefer not to trade frequently. Position trading focuses on macro-economic trends, with minimal concern for short-term fluctuations.

The core is to build positions at low-cost levels and wait for long-term trends to unfold. For example, the US dollar index peaked at 114 in recent years; investors can establish positions at relatively low levels and patiently wait for dollar appreciation.

Tip: Grasp the big picture, find low-cost entry points amid volatility, and reduce holding costs.

The Best Time to Buy and Sell Foreign Currencies

Bank Foreign Currency Trading Hours

Foreign currency trading at banks occurs during business hours, generally from 9:00 AM to 3:30 PM (varies by bank). Banks are closed on weekends and holidays, during which trading is unavailable.

Forex Margin Trading Hours

The forex market operates 24 hours a day, divided into four main trading sessions: London, Sydney, Tokyo, and New York. Due to overlapping time zones, investors can trade around the clock from Monday to Friday.

Final Advice

There is no absolute “best way” to invest in foreign currencies. Different investors should choose methods based on their risk preferences, trading habits, and capital scale. Fixed deposits suit conservative investors, funds suit those seeking balance, and margin trading is for experienced traders.

Sharpening your skills is essential. Before risking real money, practice thoroughly on demo platforms, familiarize yourself with spread calculations and various strategies—this is the shortcut to stable profits. Opportunities in the forex market are everywhere; with diligent research, you will surely find a profitable approach that suits you.