what he is about to commit. So, we may understand this scene as the one in which Macbeth is warned of what he is to do and the horror which is to follow afterwards:

Thou marshall'st me the way that I was going;
And such an instrument I was to use...

And on thy blade and dudgeon gouts of blood,
Which was not so before.

So, his guilty conscience attempts to caution him and describe to him what ensues.

Second of all, Macbeth does understand that this vision may be the result of "the heat-oppressed brain," which means he is aware that the dagger may only be an illusion. However, in spite of that realization, the dagger has an enormous impact on him, and Macbeth feels greatly disturbed. 

Last of all, we should understand that the bloody dagger foreshadows the death of Duncan and the beginning of Macbeth's moral demise.

"Is this a dagger that I see before me, handle toward my hand . ." says it all. The dagger is a symbolic, poetic image, expressing Macbeth's inner questioning, which is,"Is this thing that I am about to do an action called for by divine destiny, ('handle toward my hand"), or is that all a figure of my imagination, born of lust for power and no more.This leads directly into the point of no return for Macbeth, and he knows it. So brilliant, this play! Thanks for the great question!

Macbeth's vision of the dagger shows us how deeply he's become embroiled in the world of the supernatural. Killing Duncan wasn't just a simple act of treachery (though it was certainly that, too): it was an act of blasphemy against God himself, who had chosen Duncan to rule Scotland (at least according to the Divine Right of Kings theory).

In committing such a foul, heinous deed, Macbeth entered into a diabolical pact with the forces of darkness, and the bloody dagger is an uncomfortable reminder of this. The appearance of this terrible vision also shows us once again that Macbeth never truly feels at ease in his position as usurper. He's achieved great power, and yet he is never able to enjoy it. The bloody dagger is a manifestation of that dark, troubled subconscious that prevents Macbeth from fully adjusting to the role of king.

In act two, scene one, of Macbeth, Banquo and Fleance exit the scene, and Macbeth begins to hallucinate by seeing an imaginary bloody dagger leading him toward King Duncan's chamber. Macbeth recognizes that the dagger is simply a figment of his "heat-oppressèd brain" and that it is a manifestation of his ambition to become king by murdering Duncan. In addition to Macbeth witnessing the illusory dagger, he also hallucinates during a banquet when he sees Banquo's ghost. Banquo's ghost is a manifestation of Macbeth's guilty conscience, which is similar to Lady Macbeth's hallucinations regarding her imaginary bloodstained hands.

Macbeth's imaginary dagger is the first hallucination in the play, and it contributes to the prominent supernatural elements throughout the production. During the dagger scene, the audience realizes that characters' hallucinations correspond to their inner feelings, which helps develop the particular character experiencing the hallucination. The audience recognizes Macbeth's inherent desire to murder King Duncan, which prepares the audience to analyze future hallucinations and associate them with each character's inner feelings.

In Macbeth's solliloquy in Act 2.2, Macbeth himself identifies the dagger as a "dagger of the mind."

When Macbeth sees the dagger seeming to float in front of him, he tries to grab it.

Come, let me clutch thee.
I have thee not, and yet I see thee still.

He can't touch it, but he still sees the dagger before him. He wonders if the dagger is "sensible to feeling as to sight."

Art thou not, fatal vision, sensible
To feeling as to sight? or art thou but
A dagger of the mind, a false creation,
Proceeding from the heat-oppressed brain?

Is it just stress that causes his brain to create the dagger? Macbeth says the dagger looks as "palpable" - or able to be touched or felt - as the real dagger he now draws. Still, he says his eyes are "fools o' the other senses." Either his eyes are fooling him to tell him the dagger is real, or his other senses which tell him the dagger is not real are wrong.

Macbeth then sees that the "fatal vision" has drops of blood on it. He finally dismisses the dagger as a vision indeed as he says:

There's no such thing:
It is the bloody business which informs
Thus to mine eyes.

He concludes that the bloody plot to kill the King has caused him to hallucinate. After that, Macbeth says no more about the dagger as though it's completely disappeared. He continues to ponder the darkness and evil of the night until Lady Macbeth signals with a bell that it's time to murder the King.

It is his "heat-oppressed brain" that causes him to think he sees the dagger. He speaks to it, saying "Thou marshall'st me the way that I was going," although he's going that direction anyway (his own dagger already in his hand), and the vision stays before his eyes as he moves. Then he notices that the incorporeal dagger has gouts of blood on it, and says, "It is the bloody business which informs / Thus to mine eyes." This "dagger of the mind," as he has already called it, isn't just a dagger that appears in his mind, but is also a dagger that pierces his mind. 

He then notes that in the darkness, "o'er the one halfworld / Nature seems dead." Nature itself is dead in the dark, and it's the time for witches and Hecate and ghosts to be about. He imagines the wickedness of the night as he watches the dagger, working up his courage to murder Duncan in his sleep.