Among the most important devices in The Mandalorian are the trackers. How do they work exactly? We've seen trackers used by the good guys and the baddies already, but we're still a little unclear on the ins and outs of how they function. Here's what we do know so far.
We're never given any clear expository dialogue about how the trackers work, but we're able to piece together some information based on how we've seen them used so far. The simple explanation is that these tracking fobs are programmed to lead bounty hunters to whoever or whatever it is they're after. And these aren't just general coordinates — they're specific down to the inch.
In the first episode, when the Mandalorian is hunting the Child, the tracker doesn't just lead him to the right area, it starts beeping loudly as he finds the cradle with the Child inside. Once they're on the run, more bounty hunters are able to keep following the Child (and the Mandalorian with it), which proves that the tracking devices are somehow active, real-time devices, not just based on informants or secondhand information.
A line from IG-11 seems to give the most away about how the trackers work. The droid says, "The tracking fob is still active. My sensors indicate that there is a life form present." We can assume that, somehow, the trackers are tied to some sort of biometric data, which also explains why the Mandalorian never even attempts to stop the tracking once he has the Child; if it were a chip or some other physical tracker, he'd definitely have removed it or deactivated it (or made an attempt to).
The Mandalorian's initial tracking of the Child seems to suggest something else about the trackers, though: they're not infallible. His Client gives him not just a tracking fob, but information about the bounty's location. If the trackers are perfectly precise — which we see when it homes in on the Child at close range — why does he need any other information? Perhaps the trackers are weaker the further they get from a target, which would explain why the Mandalorian needs more information to get started, but can find the precise location of the Child once within the same room. Steering clear of the people tracking you, then, means always staying out of range, which might be exactly what the Mandalorian has to do to keep himself and the Child safe.