Traction control is a name for a computer-controlled system intended to stop wheels from spinning during acceleration. The term is also used (somewhat incorrectly) to describe yaw control, a system designed to stop a vehicle from turning when you don't want it to. Both systems work by watching information from wheel position sensors, typically the same ones used for the antilock brake system (ABS) and then doing either one or both of two things: reducing the engine power output or applying the brakes through ABS.
Wheel sensors send a regular system of pulses when the wheel is turning. Depending on the design it may also be able to tell which way the wheel is turning, but in general if you've got wheels turning in different directions you've got big problems that the car isn't going to be able to help you with. There's also a sensor aptly known as the "vehicle speed sensor" (or VSS) in the output portion of the transmission that is used to gather information on vehicle speed; in fact this sensor's output is where the information on vehicle speed comes from that's used by both the powertrain control module or "PCM", and by your speedometer to tell you how fast you're going1. There's also a tachometer sensor that tells the computer how fast the engine is turning (it needs to know this all the time, of course) and of course probably a number of others besides - but these are the most interesting ones.
The traction control computer watches the sensors all the time and comes to conclusions about whether the car is doing what it should be doing. For example, in a rear wheel drive vehicle with traction control like the Chevrolet Z06, if the rear wheel sensors are showing a high speed but the front ones aren't, the vehicle speed sensor is showing a moderately high speed, and the car is in first gear, then the car is going to know that the rear wheels are spinning and it's not actually going anywhere. If traction control is on, the car will actually reduce the engine throttle to stop this from happening so that you keep traction.
Essentially then, while ABS is traction control for braking, "traction control" is traction control for acceleration. Confused yet? Because yaw control is traction control for turning - or for not turning.
- 1. On older vehicles, all bets are off, but this is how pretty much everything from 1996 or even earlier is set up.