Fading is the process of using the spells enchant weapon, enchant armor or enchant bow with the hopes of receiving the message "<item> grows brightly, then fades." Fading removes all current enchantments on the item, as well as any flags. Flags such as Anti-Good, Magic, NoDrop and NoRemove are the primary flags people attempt to remove by fading, though the latter two are more commonly removed by using remove curse.
Since many Hero level gear is Anti-Good by default, fading is a practical requirement for use (except for Shadowfist and Sorcerer characters who have practiced Demonic Intent, who in turn would need items that load Anti-Evil to be faded prior to their use.
Items with the magic flag need to be faded prior to being transmuted. This most commonly happens when one wants to dual-wield the same weapon, but lacks the rogue skills balance and poise. With the magic flag removed, an item can be transmuted lighter or heavier to be used in the offhand or main wield slot, respectively. Remember that transmuting an item will raise its level by 1 or 2 levels.
Since fading is a random result of the enchant spells, very often an item can be rendered unusable in the process of trying to fade it. For instance, an item that loads Anti-Good can receive the Anti-Evil flag and the Anti-Neutral flag when a good aligned caster "successfully" enchants the weapon. Since both successfully enchanting and fading add a level to the item, an item which still hasn't faded at level 54 (for hero armor) or level 56 (for hero weapons) must either be harmed or scrapped.