"Multiple level thinking is largely what seperates professionals from amateurs, what seperate players who win at the top levels from those who lose" - Sklansky
For the most part players on my level, including myself, think on level one the majority of the time. This level, refered to as the "Zeroth" level in "Theory and Practise", is where a player only considers his hand and what possible hands can beat his hand.
The next level or '1st level' is where we consider what our opponent has based on the actions that he makes. For instance, he raised pre-flop therefore he must have a strong hand or he made a big bet he must have hit his hand, or his bet is typical of a weak hand... etc. etc.
The following level or '2nd level' we think about what our opponents might think we have based on the actions we've taken. So if we raised pre-flop our opponents are likely to think we have AK rather than J5.
Using just these three levels and maybe the third level, which is to think about what our opponent thinks we think he has, we should have a significant edge on most opponents at the micro stakes.
The trick is to put your opponent at a level and think one level deeper, which will usually be the 2nd level.