Hands-on: Google Daydream View review
There's a few different internal components which can be used in a head-tracking system such as a gyroscope, accelerometer and a magnetometer. Sony's PSVR also uses nine LEDs dotted around the headset to provide 360 degree head tracking thanks to an external PS4 camera monitoring these signals, Oculus has 20 lights but they are not as bright.
Head-tracking tech needs low latency to be effective - we're talking 50ms or less or we will detect the lag between when we turn our head and when the VR environment changes. The Oculus Rift has an impressively minimised lag of just 30 milliseconds. Lag can also be a problem for any motion tracking inputs such as PS Move-style controllers that measure our hand and arm movements.
Finally, headphones can be used to increase the sense of immersion. Binaural or 3D audio can be used by app and game developers to tap into VR headsets' head-tracking technology to take advantage of this and give the wearer the sense that sound is coming from behind, to the side of them or in the distance.