Keyword density refers to the percentage that a given keyword phrase appears in your content on a given page. For example, if you have a page targeting the phrase 'SEO is great' (which it is!) and your phrase appeared 5% of the time, your keyword density for that phrase would be... 5%!
That's it. Now all you need to do is stop worrying about density, because it has been confirmed by numerous studies and reports (see http://www.seomoz.org/ugc/seo-myths-that-persist-keyword-density on Youmoz for example) that KW density is not taken into account for any other purpose than spam detection.
Years ago, stuffing your page full of your keyword would let you rank above your competitors, now it will see your site de-indexed or at least buried.
The only thing to worry about with KW density is that you avoid having one that is too high. I've seen new clients' competitors sites outranking them with a density of less that 1%, without significant differences in off page strength. It is not worth worrying about, all you need to do is write your content with human visitors in mind. Put it this way, would you even read (let alone trust) a page stuffed full of a redundant KW phrase?
So what is a too high density? 6% maximum (as suggested by John23) I would say is far too high. Ezine Articles for example will refuse any article that has over 4.5% density, and they are hardly entirely free of spam.