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A cancel, as the name implies, is the ability to break out of the animation of a move with another move, usually done during the recovery frames of a move. It should not be confused with linking.
The concept of cancels were first seen in Street Fighter II and have been in almost every fighting game since. Though each fighting game has its own rules on what moves can be cancelled and what these moves can be cancelled into, most games follow the same general formula:
Normal Move -> Special Move -> Super/Hyper Move
In The King of Fighters, cancelling a Special into a Super is referred to as a Supercancel, while cancelling a Super into another Super is known as a Dreamcancel.
A special case exists in some fighting games, most notably in the Marvel vs. Capcom games, where a Normal can be cancelled into another Normal. These types of cancels are known as chains or chain cancels.
Some games also have special mechanics that allow for different types of cancels. For example, Street Fighter IV has a mechanic known as Focus Attack Dash Cancel, which allows the character to cancel the animation of any move with a short dash at the expense of half of their super meter.
The Guilty Gear series also has a similar mechanic known as Roman Cancel, which allows a character to cancel a move back to their standing animation in order to use another attack immediately after, typically used on attacks with large end lag or to combo a Special Move back into a Normal. If successful, a red flash appears and half of the Tension Meter is used, but if used at the right time during certain Special Moves, a blue flash appears and only quarter of the Tension Meter is used; this is called a False Roman Cancel.
Both mechanics have the potential to perform, as well as extend, combos that would not normally be possible otherwise.