For the concept of passphrase, read the topic on Wikipedia. If you are not so sure how to select a good passphrase, try DiceWare.
When a passphrase is needed, MyPrivacyKey will prompt you for one. MyPrivacyKey caches your passphrase in the memory for your future use for a period of time. This is configurable through "Tools > Options".
To manually control your passphrase in memory, use "Privacy > Set/Clear Passphrase". You can set a passphrase up front, or you can clear a passphrase that you may have set wrongly. When you see failure, do make sure your passphrase is correct.