How does the CF 2018 performance monitoring toolset actually monitor a server when installed on a different box? Is it reading log files or actively reading operations in real time? Also why is it recommended to install it on a another box, what kind of resources would it consume if on the same box as the web server?
This is going to be a pretty vague answer. In general, performance monitoring tools actually get data from collectors on the client. This would fall into the second category. Actually running performance monitoring tests is computationally expensive, which is why it's typically done on a second box in a production environment.