It knows this because it knows where it isn't.

By subtracting where it is from it isn't, or where it isn't from where it is (which-ever is greater), it attains a difference or deviation. The guidance system uses deviations to generate corrective commands to drive the missile from a position where it is to a position where it isn't, arriving at a position where it wasn't, but is now. Consequently, the position where it is, is the position where it wasn't. So it follows that the position where it was, is the position where it isn't. In the event that the position where it is now is not the position where it wasn't, the system has acquired a variation. The variation being the difference between where the missile is and where the missile wasn't. If the variation is considered to be a significant factor, the missile guidance logic system will allow for the variation, provided that the missile knows where it was or is not now. Due to the variation modifying some of the information obtained by the missile, it is not sure where it is. However, the thought process of the missile is that it is sure where it isn't, and it knows where it was. It now subtracts where it should be from where it wasn't and adds the variable obtained by subtracting where it isn't from where it was. In guidance system "language" this is called error, or the difference between deviation and variation found in the algebraic difference between where the missile shouldn't be and where it is.

Simple.

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