There are two types of positions that can be opened: long and short
To open a long position for ETH/USD Kraken would purchase the ETH using funds from our USD margin pool.
To open a short position for ETH/USD Kraken would sell ETH from its ETH margin pool, acquiring its value in USD
How to open a margin position on Kraken.com?
To create a margin order, you enter everything in the order form just as you would for a regular spot trade (the "Amount" field still determines the size of the order, the price parameters for the various order types work the same, etc.) — EXCEPT you must select a level of leverage for the order:
* You can only select leverage in the Intermediate and Advanced order forms.
Selecting a level of leverage means that the order, if executed, will execute a spot trade using funds from Kraken’s margin pools (rather than a spot trade executed directly from the balances in your account if no leverage is selected).
Note: In order to open a margin position, you will need to hold a balance of at least one Collateral Currency.
If you only hold funds in non-collateral currencies, you will not be able to margin trade until collateral currencies are deposited in the account or acquired from the market.
What about the different levels of leverage?
The different levels of leverage just determine how much of your account balance is "tied" to the position as a kind of "collateral" for the funds used to open the position.
If you have 10 XBT in your account and open a 5 XBT long @5:1 leverage, then 1 XBT is tied to the position. Since only 1 XBT is tied to the position, you could withdraw up to 9 XBT, but not more, because that last 1 XBT is tied to the position.
Similarly, the 9 XBT is available in your account as buying power for opening more positions or making other trades. With 5:1 leverage, you could open positions up to 50 XBT in total volume. Keep in mind that while having positions that are much larger than the balance of your account gives you a chance at larger profits, it also puts you at risk of amplified losses, margin call, or even liquidation.
Alternatively, if you select 2:1 leverage instead of 5:1 leverage, then 2.5 XBT would be tied to the 5 XBT position. In this case you would only be able to withdraw up to 7.5 XBT and would only have 7.5 XBT of buying power left for other trades.
The possibility of larger profits along with the risk of larger losses or margin call and even liquidation is determined by the size of the position relative to your account balance (and not merely by the level of leverage you select).
If you have a 10 XBT balance and open a 5 XBT position, the choice of 5:1 leverage over 2:1 leverage does not really make the position more risky.
In many cases it may be better to choose the higher level of leverage leaving more buying power in the account, so long as the trader is mindful of not getting to the point where the size of the position relative to the size of the account goes beyond their risk tolerance.