Base effect
Why does the same dollar move register as a much larger or smaller percentage depending on where a market starts?
In plain words
The base effect is the way a percentage change depends on the level it is measured from. A move of a given size produces a bigger percentage when the starting price is low, and a smaller percentage when the starting price is high, even though the dollar amounts are identical.
Why it matters
Percentages flatter or exaggerate moves depending on the starting level, so a large percentage gain after a deep decline may still leave a market far below where it began. Anyone comparing returns across periods, or sizing risk from past percentage swings, has to notice whether the base itself has shifted.
In a real week: ETH, week of 25 February 2019
In the week of 25 February 2019, ETH opened at 132.1 and closed at 130.6, a return of -1.14%, while sitting 84.98% below its 52-week high. Its prior four weekly returns were -4.18%, 16.58%, 6.9% and -1.25%. At the close of this week, after those four weeks, ETH was still 84.98% below the 52-week high, so each percentage was measured from a base far under that peak.
A common mistake
Reading a large percentage gain as evidence of strength without checking the level it started from. After a deep decline, impressive percentages can simply describe a partial recovery towards a former peak.