The outhaul is used to pull the clew of the mainsail out, tightening the foot of the sail. This has the effect of flattening the bottom section of the sail, and thus depowering it.
As a general rule when sailing upwind in about 10 knots, you should have the outhaul pulled on so that you have about a 7½ -10cm or 3-4 inch gap between the boom and center of the foot of the sail. In heavier conditions, start tightening the outhaul so that you begin to flatten the sail. When sailing downwind or in light breezes, ease the outhaul.
Run the outhaul through the cleat on the boom, then to the boom fairlead, up to the sail clew and back to the fairlead (see photo). To tie it off, a bowline knot is generally used.
Rather than running the outhaul straight through the clew, a hook and pulley system is also often used to allow easier outhaul adjustment when on the water.
A loop (eg. a bowline) in the end of the outhaul is recommended so that it provides an easy holding point.