Animation parameters in Unity are variables that control which animation plays. The Animator component checks these parameters to decide when to switch animations. For example, setting a boolean parameter 'isRunning' to true tells the Animator to transition from the Idle animation to the Running animation. When the parameter changes back to false, the Animator transitions back to Idle. This process involves setting parameters in code, the Animator checking them, and then playing the correct animation based on those values. If parameters do not change, the Animator continues playing the current animation. This visual trace shows each step from setting parameters to animation transitions and playing animations.