The Preferences page is a confusing mishmash of options. Fortunately, except in seriously pathological circumstances, testing these options shouldn't cause you any great harm. Once you've set the options you like, clicking the Save Preferences button will save your preferences. None of your preferences take effect until you hit the Save button.
The Reset Preferences button will fill the fields on the page with the original values, in case you start messing around with them and forget what you actually had before.
Here's a brief description of each of the preferences on the Preferences page:
Your nickname. For signatures in talk pages and elsewhere, a short nickname can be helpful. If you leave this blank, your full user name will be used in signatures.
Change Password. Change your user password. You have to enter your old password once, and your new password twice. Again, your password remains unchanged until you hit the Save button.
Remember my login on this computer. Whether or not to keep your authentication credentials around between sessions. This is useful if you use Wikitravel from your personal computer; if you use it from an Internet cafe or other public computer, keep this unset.
Enable e-mail from other users. If set it will turn on the E-mail this user link on your user page. Wikitravel:Administrators may, under extreme circumstances, still contact you through email.
No configurable options here.
Limit images on image description pages to sets the maximum size of images that your browser will download. Set to a small value if you are on a slow link.
Thumbnail size is the default value of images that do not have the size set explicitly in the text.
Date and Time
Date format. Defines how you want to see calendar dates formatted.
Time offset. Determines what time offset to use when displaying edit times in the Page history page, and in some other places, but not all. Use the Fill in from browser button to set this, unless your browser doesn't know what time it is where you are.
Textbox dimensions. Defines the height and width of the editing text box shown when you edit a page. Leave this at the defaults unless you have a really screwy browser.
Enable section editing via  links. When this is set, each heading in an article will mark off a section that can be edited individually. This can be nice for editing long articles, but makes pages a little busier.
Enable section editing by right clicking on section titles
Edit pages on double click. This option allows you to edit a Wikitravel article by double-clicking on the article rather than clicking on the Edit this page link. It can be useful if you do a lot of skimming and editing; it can be a hassle if you're used to using double-click for text selection and copy-and-paste.
Edit box has full width. If set, the text area for editing pages will fill your browser window.
Show preview on first edit
Show preview before edit box. After clicking the Show Preview button on the editing page, the article text will be shown before the text area containing the Wiki markup, not after it. A matter of preference.
Mark all edits minor by default. Defines whether or not to set the This is a minor edit checkbox on the editing page by default, you can change this before you save the edit.
Days to show in recent changes
Number of titles in recent changes. When using Recent Changes, this many article titles will be shown. Usually 50-100 is a good default.
Hide minor edits in recent changes. If set, changes that the contributor has marked as "minor" won't show up in the Recent Changes page or elsewhere.
Maximum number of days to show in watchlist
Expand watchlist to show all applicable changes
Hide my edits from the watchlist.
Add pages you create/edit/move to your watchlist. If this is set, by default the Watch this article checkbox on the page you change will be set. You can uncheck it on case-by-case basis.
Search in these namespaces by default. Which namespaces to search in by default. Searching just the (Main) namespace is sufficient if you are after travel information. If you are editing and contributing to policy discussions, you will probably want to add some other namespaces as well.
Lines to show per hit. How many lines of text to show on full-text search results. Leave this at the default value unless you're really concerned with Search functionality.
Hits to show per page. Determines how many article titles are shown when you use the Search functionality. Leave this at the default value unless you're really concerned with Search functionality.
Characters of context per line. When showing full-text search results, how many characters to show in the line. Leave this at the default value unless you're really concerned with Search functionality.
Disable page caching. If you are having problems with pages seeing old cached versions of pages, changing this option will have no effect at all, as this is due to a unresolved bug.
Format broken links. If an internal Wikitravel link points to an article that doesn't exist yet, this determines how that link appears. If set, it shows broken links with a specific color; if not, it shows broken links with a question mark.
Justify paragraphs. If set, paragraphs in Wikitravel articles will be formatted to avoid jagged line endings. If unset, the paragraphs will be formatted as-is.
Underline links. Show links in Wikitravel articles with underlines.
Auto-number headings. If set, this option adds outline numbers to all the headings in an article.
Threshold for stub link formatting. When this is set, links to articles shorter than this number of characters appear in a different color.
Do not show ad column. This turns the paid advertising on the right hand side of the screen off. Yay.