In extremely simple terms, NAT (Network Address Translation) helps determine how your router interacts with the rest of the internet. If your NAT settings are restrictive, you may have problems connecting to other players. To test your settings, go to the Xbox 360 Dashboard and test your connection. At the bottom of the test results, you will see your ‘NAT Type.’ You want it to say ‘Open’ – if it says ‘Moderate’ or ‘Strict’ you may experience some problems.
If you’re NAT settings display ‘Moderate’ or ‘Strict,’ you should consult your router’s documentation (That didn’t really help me), either online or in the instruction manual.
In computer networking, Network Address Translation (NAT, also known as Network Masquerading, Native Address Translation or IP Masquerading) is a technique of transceiving network traffic through a router that involves re-writing the source and/or destination IP addresses and usually also the TCP/UDP port numbers of IP packets as they pass through. Checksums (both IP and TCP/UDP) must also be rewritten to take account of the changes. Most systems using NAT do so in order to enable multiple hosts on a private network to access the Internet using a single public IP address (see gateway). Many network administrators find NAT a convenient technique and use it widely. Nonetheless, NAT can introduce complications in communication between hosts and may have a performance impact.
See also “Opening “NAT” For WRT54G Router”.