An OTDR is an instrument used to test fiber optic cables by launching an optical signal and analyzing the return signal. It can measure attenuation, length, and losses from splices and connectors. The basic principle is that it works like an optical radar. Key factors for OTDR setup include range, pulse width, index of refraction, and averaging time. OTDRs can identify events along a cable and be used for fault location and documentation. Trace analysis involves using cursors to measure losses and lengths. Limitations include difficulty resolving short distances in LAN environments.