
Literally speaking, the setting of the poem is a "yellow wood," where two roads "diverge." This means that the speaker is in the woods in the early fall, when the leaves have turned yellow:
Two roads diverged in a yellow wood...
The speaker is confused which road he should take and tries to look down one as far as he can, but realizes he does not know where each of them leads.
Metaphorically speaking, the setting of the poem is the speaker's mind. The phrase "yellow wood" may imply that he is at his later stage of life. In his mind, the speaker can see two roads, which represent the two options that he has, and he must choose one option. He cannot choose both options simultaneously. This proves to be an agonizing task for the speaker because he does not know where each option would take him:
And both that morning equally layIn leaves no step had trodden black.

The setting is a crossroads in a woods: a place where two roads meet, one going one way, one the other. It appears to be fall, as the wooded area is described as "yellow," probably a reference to the color of the leaves on the trees. The roads seem to be in an isolated spot, as the narrator is all alone, and they seem primitive and unpaved. Frost describes one as "grassy" and said it "wanted wear," meaning that not many people had been walking on it. Because grass is growing on it, we can imagine it as an unpaved footpath.
Frost explained that the poem was a joke that emerged from his friend Edward Thomas's tendency, when they were walking together, to complain that whatever path they took, they should have taken a different one.
However, once a poet publishes his poem, the public takes possession of it, and generations of readers have understood Frost's diverging roads as a metaphor celebrating the importance of following one's own heart when it comes time to make choices in life.

The external setting for Frost's poem, "The Road Not Taken," is a yellow wood. The poet is, literally, gazing upon two paths in this wood: Both paths are grassy and worn... really worn about the same. However, the more complex setting is the internal setting of this poem, the poet's heart and mind. In that setting, the poet is thinking about choosing a path, making a decsion. It is this choice, represented by the path metaphor, that will make all the difference in the poet's life!