Liquidation happens when a trader uses borrowed funds (leverage) and the market moves against the position far enough that the remaining collateral, called margin, falls below the maintenance requirement. At that point the exchange closes the position automatically to prevent the account balance from going negative.
The size of the move needed to trigger liquidation scales inversely with leverage. As a rough illustration, a position using 10x leverage can be liquidated after roughly a 10% adverse move, while 2x leverage tolerates a much larger swing before the margin is exhausted.
Liquidations matter for market structure because they remove positions involuntarily and can add momentum in the direction the price is already moving. Large clusters of liquidations are often visible in derivatives data and are watched as a measure of how stressed leveraged participants are.