Nodes within clusters tend to be close together, while nodes in separate clusters are further apart. TouchGraph's cluster algorithm identifies long edges which are likely to connect separate clusters and ignores them. As more and more edges are ignored graph is split out into separate connected components which form the clusters.
The cluster computation algorithm used by TouchGraph is fast and non-deterministic. It may create slightly different results each time. The Recompute Clusters button allows you to try the algorithm again to get a different grouping. Only nodes that are on the border between clusters are usually affected.
Clusters are assigned different colors in the graph. Sometimes two adjacent clusters get assigned the same color. In such cases it may be useful to use the randomize option in the Node Appearance - Colors dialog to change the cluster colors so that splits between clusters can be revealed.