The Montgomery reduction algorithm finds the remainder of a division. Many cryptographic schemes work with numbers modulo a prime. When you have to multiply two numbers with e.g. 128 bits each, first you multiply them the usual way (there are many techniques for this) to obtain a 256-bit (“double precision”) number. Then you need to reduce this result modulo the prime you’re working with, that is, compute the remainder of the division of this number over the prime.
You can compute the remainder of a division with the “schoolbook” technique everyone learns in school, but that is expensive and requires divisions, with are costly in many platforms (some microcontrollers don’t even have a division instruction). Montgomery reduction only needs a division by a powers of the integer size, which are cheap for computers.
Here I’ll try to explain how it works, in an informal approach. For detailed proofs of its correctness, check e.g. the chapter 14 of the Handbook of Applied Cryptography or the original paper.