Target indicator does not point to target

I am copying my reply on the steam community post with a solution that worked for me. @Straatford87 this may be useful information for debugging the issue.

TL;DR: Find the proximity sensor on your headset that is used to make sure your headset is actually on your face, and make sure that it's working! Cover it with something, if you have to.

As far as I can tell, most VR headsets have some kind of proximity sensor to see if the headset is attached to your face. For example, the Index's is here:
https://preview.redd.it/k3jaw8mfh6x21.png?width=950&format=png&auto=webp&s=16cba61e6a937f6bce60948d0223ba685247b562

Star Wars Squadrons displays weird behaviors when this sensor thinks that the headset is not "worn" (i.e. it does not detect your face because it is too far or something similar). Many other games ignore the proximity sensor input entirely, so it's possible that those of you who are used to playing other games haven't had issues in the past with this sensor not working.

(In my case, the reason the sensor was not tripping was because I was spacing the top of my headset away from my face using magnets between the gasket and the headset. This is for better fitment with my face shape, otherwise the headset ends up angled quite upwards.)

The behavior of the game when the headset is not "worn" is that it will assume that the player's head position is somewhere else entirely. In my case, what really tipped me off was that when this started happening, my openVRtwitchchat window (which is injected to a particular world coordinate) disappeared, and when I looked around, it was behind me and in the floor, about 2-3 meters away from where my head actually was. When I pressed the headset in towards my face with my hands, the problem went away temporarily, because I was physically moving the sensor close enough to my face to work again.

When I say that the game thinks that your head is somewhere else, I don't mean that it will affect how the game renders 3d objects such as your cockpit, other ships, the map, or even menus. Those are all rendered correctly relative to your "real" head position. However, there are 2d GUI elements that are rendered into your viewpoint by the game, and these will be affected by the "wrong" head position that I mentioned earlier. For example, the weird orange lines in the menu are usually far in the background, but when the headset isn't "worn" then the orange lines will be in the foreground. I assume this is because the game thinks your head is far behind where it actually is.

Similarly, the in game GUI for targeting is affected. I did some testing in the practice arena by targeting the frigate. I found that I could get the targeting box to show up by looking in a particular direction, but the targeting box both did not line up with the actual frigate, nor did the movement line up with my head movements with respect to the frigate location. However, with some careful head movement, I was able to line up the targeting box with the frigate and I found:

When I moved my head up, the targeting box moved down.
When I moved my head down, the targeting box moved up.
When I moved my head right, the targeting box moved left.
When I moved my head left, the targeting box moved right.

The targeting box consistently moved in the opposite direction of where it would need to move to track the location of the frigate correctly. I think this is because the game is using the "wrong" head position to calculate where in the field of view to render the targeting box, and the "wrong" head position is not only offset from my real head position, it's also upside down.

It's not clear to me exactly where this "wrong" head position comes from, although in my case I suspect it may have something to do with some kind of default position that steamVR gives to the game that is based on your room setup. I would assume WMR does something similar. Regardless, I was able to fix this by removing some of my magnet spacers from my headset to make sure the face proximity sensor was close enough to my face to work correctly. Similarly, the game worked fine for me yesterday, and I suspect this is because yesterday I was playing with some lens adapters in the headset, but today I took those out and played with contacts on. I suspect the lens adapters actually occluded the proximity sensor well enough to make sure it was always on, even with the display spaced fairly far away from my face.

(Aside: there are apparently other games that have issues with the proximity sensor! LA Noire apparently just never progressed past the loading screen but at least it told you exactly what the issue was with a message telling you to put on your headset.)