Well in general terms, closed loop means that whatever you're using to control something (in this case A/F ratio) has some sort of a feedback device to see what the results are, and then it makes adjustments accordingly.
For example, lets say you have water flowing through a pipe, and you need 50 Gallons / minute (GPM). In every system, there is a controller that tells the pump how quickly to run. A simple way to control this would be to put a knob on the wall for a man to control pump speed. But then if the pump is pumping 55 GPM, the controller (knob) doesn't know that it should do anything to fix it. This is "open loop" control, also known as running blind.
Now lets get a more sophisticated controller for our pump. We'll also add a flowmeter somewhere in our pipe. The controller will watch the flowmeter, and if sees that it's pumping 55 GPM, it will slow the pump down so it reaches it's setpoint of 50 GPM. That is "closed loop" control. The flowmeter "closes" the control loop (gives feedback to the controller so it can make an adjustment).
The ECU does the same thing with the oxygen sensor. If it sees too rich of a mixture, the ECU can make adjustments to what's going into the engine so that it balances out to the setpoint A/F ratio (when the "closed loop" is enabled) based on what the oxygen sensor is reading. So if the oxygen sensor sees 14.0:1, and setpoint is 14.7:1, closed loop control will have the injector back off a bit on how much fuel goes into the motor (injector pulse width).
FWIW, I run with my closed loop enabled all the time (after it's up to temp). My idle speed is around 700 RPM, and I have my high & low at like 550 & 500.
I've found that two things (well a lot more than that, but two biggies) cause a poor idle- trying to idle too lean, and trying to idle with too much advance.
Hope that helps!
-Bob Cunningham
bobc@gnttype.org