Tina Gray, a teenager, walks through a boiler room dressed in a nightgown. She is stalked and attacked by a disfigured man wearing a blade-fixed glove. She awakens from the nightmare, but her mother points out four mysterious slashes in her gown.
The following morning, Tina is consoled by her friend Nancy and her boyfriend, Glen. Later, Nancy and Glen sleepover with Tina following her mother's out-of-town departure. The sleepover is interrupted by Tina's boyfriend Rod, who tries to have sex to reconcile after arguing. Falling asleep, she sees the man and runs. Awakened by Tina's thrashing, Rod witnesses her being fatally slashed by an unseen force. He flees as Nancy and Glen find Tina, mistakenly blaming Rod. Nancy tells her father, Lieutenant Don Thompson, of Tina's death.
The next day, Rod proclaims innocence to Nancy, but Don arrests him. At school, Nancy falls asleep in class and finds the man, calling himself Freddy Krueger, chasing her in the boiler room. Nancy burns her arm on a pipe and awakens in the middle of class, excusing herself. She notices the burn mark on her arm and is concerned. At home, Nancy falls asleep in the bathtub and nearly gets drowned by Freddy. Nancy goes to Rod, who tells her what happened to Tina, and Nancy believes Freddy is responsible for Tina's death.
Nancy has Glen watch over her as she falls asleep. She tries to find Freddy and sees him preparing to kill Rod. He turns his attention on her; she runs and wakes up when her alarm clock goes off. Nancy and Glen go to the jail and discover Rod has been hanged in his cell by his bed sheet in an apparent suicide. At Rod's funeral, Nancy's parents become worried when she describes the man in her dreams. Her mother, Marge, takes her to a dream clinic. In her dream, Nancy is attacked again and grabs Freddy's hat. When the staff wake her up, she has a gash in her arm and she somehow has Freddy's hat with her.
At home, Marge bars the windows and begins drinking heavily. Eventually, she tells Nancy that Freddy was a child murderer released on a technicality. In a form of vigilante justice, the parents in the neighborhood burned him alive. Realizing that Freddy desires revenge, Nancy convinces Glen to help her. She plans to take Freddy into the real world and set up booby traps in her house. Concerned over her influence, Glen's parents prevent the two from meeting. Glen falls asleep at their appointed hour, and Freddy kills him.
Alone, Nancy puts her drunken mother to bed and convinces her father across the street to break into the house in twenty minutes. In her sleep, she locates Freddy at the last second and pulls him out of the dream. In the real world, Nancy runs from Freddy, who trips on the booby traps. She lights him on fire, locks him in the basement, and rushes to the door for help. The police arrive, and they realize Freddy has escaped the basement. In Marge's bedroom, they see a still-burning Freddy smother her. After Don puts out the fire, Freddy and Marge have vanished. Despite her father's words, Nancy believes she is still in danger.
Freddy attacks Nancy once again. Realizing he is powered by his victim's fear, she calmly turns her back on him, reducing him to nothingness. She steps outside into a bright morning where all of her friends and mother are still alive. She gets into Glen's car to go to school when the top comes down and suddenly locks them in. As the car is driven uncontrollably down the street, Marge is grabbed through the window of their front door and is dragged through it to her apparent death.

Question: How did Nancy reduce Freddy to nothingness?
Answer: She realized he was powered by his victims fear and turned her back on him
Alternative answer: Calms down and stops believing in him.