The actual altitude above mean sea level (MSL) is called true altitude. This is the altitude used in publications like charts and maps.
The altimeter uses the air pressure in the environment. It “indicates” an altitude when the current altimeter setting is used to calibrate the instrument. This setting is derived from ground-based stations and usually received over the radio from ATC or ATIS/AWOS stations. Keeping this updated will ensure that your indicated altitude is as close to the true altitude as possible. This is the altitude you will use most often in a non-pressurized aircraft.
As the air gets hotter, it also gets thinner and degrades the performance of the plane. Thinner air provides fewer air molecules for the engine, propeller, and wings. This results in significantly reduced performance, especially when taking off. Airport weather stations will SOMETIMES report a density altitude but it is up to you to always use the temperature received from the ATIS/AWOS and verify your takeoff performance. An airplane’s POH will have takeoff distance charts that take the temperature into account. Remember that density altitude does not affect your altimeters ability to tell you how high up you are. Instead, it represents the altitude that the plane “feels”.
Pressurized aircraft above 18000 feet are not concerned with terrain in most parts of the world because they are high above all but the very highest mountains. At these altitudes, the only collision danger is with other aircraft. This is why pressure altitude is used. Above 18000 feet all aircraft set their altimeter to the standard pressure of 29.92 inches of mercury. Pressure altitudes are expressed as flight levels. So 20,000 feet measured with the altimeter set at 29.92 is called “Flight Level Two Hundred” (FL200). Planes flying in the same area will all know what altitude they are at in relation to each other but they will not know precisely what their true altitude is.
Absolute altitude is your altitude above terrain. It is often called “Above Ground Level” (AGL) altitude. This is measured directly using a radar altimeter. However, most light aircraft do not have a radar altimeter and the pilot must rely on an understanding of the difference between his aircraft’s indicated altitude and the elevation where he is flying. For example, if an airport is at 400 feet elevation above sea level and a pilot wants to fly at 1000 feet AGL he will fly the plane at 1400 feet indicated.