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By Michael Trinkle, ForexTraders Today the worlds focus is still on Japan and the countrys multitude of crises. The Japanese stock market was down by more than 6% today, but the rest of the world was mostly calm, perhaps on the expectation that the aftermath of the catastrophe will not be that bad for the Japanese economy as the government returns to its old habit, this time unavoidably, of splashing cash around in order to deal with the consequences. In Libya, conflicting reports speak about the Colonels forces being forced once again out of the eastern regions where they were thought to have defeated the rebel forces. U.N. Security Council and NATO are still unsure about if and how they should intervene in the crisis, which is supporting oil prices so far.  As the world watches Japan, anxious to see an end to the events that ensued Fridays terrifying earthquake and tsunami, the possibility of a reactor core meltdown in one or several of the reactors in the affected region threaten to turn this into a long-term catastrophe for Japan as well as the whole region. But we would like to focus on another aspect of the disaster, which is perhaps more relevant to us as traders, although we do share the feelings and suffering of the Japanese people as human beings. We learn from reports and comments of Japanese engineers that the builder of the endangered nuclear reactors in Fukushima, Toshiba, did not exclude the possibility of the facility being struck by an earthquake, as well as a tsunami. To ensure that within the bounds of probability the reactor would be able to withstand the impact of an earthquake, a triple safety system was built, and it was thought that a meltdown of the sort that the countrys now being threatened with would only occur if all these measures were to fail at the same time. This was thought to be safe enough from a practical point of view. As part of the design, and apart from the reactors own cooling system that receives its power from the local grid, there is a backup generator that switches on when the main system fails. If both were to fail, a third system would intervene to convert the steam generated in the cooling process to water and pump it back to the reactors core so as to prevent overheating and melting. But once again, as it often happens in the markets, what was thought to be impossible merely on the basis of probabilistic arguments was found to be inadequate in the chaotic environment of real life. What happened on Friday and the weekend is frequently summarized by news sources around the world. We need to ask ourselves if the reactors would have been built in case that the engineers had foreknowledge of a disaster of this kind occurring, in spite of their calculations and confidence in probability measures. The answer is no. But they were built just like the LTCM built up its Russian government debt in 1990s, investment banks built their subprime portfolios in 2000s, and investors are building their stockpiles of government debt as part of a run to safety these days. The idea is that so many things cannot go wrong. But they can, and they always will do, if the experience of history teaches us anything. The fact that black swans do exist, and that they can amplify tiny probabilities to extremely painful effect, is confirmed once again. If you dont believe in something, dont do it even if the whole world thinks it is the best idea of the century. If you dont understand something well enough, dont take related risks. For the trader, this is perhaps the most important lesson to be derived from the last few days events among all the human suffering and tragedy. More articles from ForexTraders….