Historical fantasy usually takes one of four common approaches:
Magic, mythical creatures or other supernatural elements co-exist invisibly with the mundane world, with the majority of people being unaware of it. In this, it has a close similarity to contemporary fantasy. This commonly overlaps with the secret history trope. Alternatively, the author's narrative shows or implies that by the present day, magic will have retreated from the world so as to allow history to revert to the familiar version we know. An example of this can be found in Lord Dunsany's The Charwoman's Shadow, which takes place in Spain, but which ends with the magician in it removing himself, and all creatures of romance, from the world, thereby ending the Golden Age.
It also can include an alternative history where the past or present has been significantly changed when an actual historical event turned out differently.
The story takes place in a secondary world with specific and recognizable parallels to a known place (or places) and a definite historical period, rather than taking the geographic and historical "mix and match" favoured by other works of secondary world fantasy. However, many, if not most, works by fantasy authors derive ideas and inspiration from real events, making the borders of this approach unclear.
Historical Fantasy may also be set in a fictional world which resembles a period from history but is not that actual history.
All four approaches have overlapped in the sub-genre of steampunk commonly associated with science fiction literature. However, not all steampunk fantasy belongs to the historical fantasy sub-genre.