Leveling is an in-game battle of psychology.
It stems from this:
Level 0: What do I have?
Level 1: What does my opponent have?
Level 2: What does my opponent think I have?
Level 3: What does my opponent think that I think they have?
Level 4: What does my opponent think that I think they think I have?
A great example of leveling is shown in this hand.
Lets say it’s HU between two thinking, aggressive opponents. 5/10:
Abe opens BU to 30
Bob (hero) calls with ATo
flop is A92
Abe cbets 45. (This is a board that Abe will be cbetting with nearly 100% of his range. Because both players know this, there is some interesting leveling that can go on here.)
Bob c/r to 125. (In this case, Bob is making this c/r because he thinks he can "level" his opponent to play back at him with air. A c/r on this board looks very unbelievable to Abe for many reasons: 1) Bob not 3betting pre takes out a lot of BIG aces from his range 2) Bob knows Abe is cbetting a wide range here 3) The board is so dry that it would be counter-intuitive to fast play a big hand.)
Because of all these factors, Bobs c/r can look very "bluffy" to Abe and can cause him to attempt a re-bluff or even to stack off very light on this board.
Let’s say they both get it in here and Abe shows JJ and Bob scoops the pot with AT. He has essentially leveled his oppenent to stack off light by thinking a level ahead of his oppenent.
Obviously this is an important concept at mid-high stakes because you need to get into your oppenents head and decipher what actions he is likely to take in response to something that you do. Another easy example is 3betting a guy two hands in a row. Some players may give more respect the second time because "you wouldnt do that with a bluff twice" or they might be more inclined to think your pushing them around. It is important to figure out which level your opposition is on, so that you may play correctly against them.