When you use two (or more) colours of yarn at a time and alternate colours in your stitching, you are doing stranded knitting. Fair Isle knitting is a form of stranded knitting that uses patterns traditional to Fair Isle, an island between Scotland and Norway. Many knitters are intimidated by stranded knitting, fearing that holding two different strands of yarn will be difficult to manipulate. With a little practice, though, you can knit with two colours of yarn at the same time to create beautiful knitted items.
Cast on 25 stitches in one colour. Because the item to be knitted here is just for practice, you don't have to worry about using a specific technique to cast on. Just use your preferred method.
Determine how you will hold the two strands of yarn. With continental knitting, you hold the yarn to be knit in your left hand and "pick" the yarn to bring it through the stitch. In English knitting, you hold the yarn in your right hand and "wrap" the yarn to pull it through the stitch. For stranded knitting, you can hold one colour in each hand, both in your left hand or both in your right.
Knit four rows to provide a base on which you'll practice stranded knitting. At the beginning of the next row, hold both yarn strands in the configuration you prefer.
Knit five stitches in the same colour you used in the cast-on. Knit the next stitch with the second yarn. Alternate colours until the last five stitches of the row. Knit those stitches in the first yarn.
Maintain an even gauge by not pulling your yarn too tightly or loosely as you knit. Because you are working with two strands, some stitches might pucker if you pull one more tightly than the other. This will result is a lumpy, less elastic fabric.
Purl the next row. The first six stitches should be purled in the first yarn. Then alternate colours again to create a checkerboard effect.
Knit the first five stitches with the first yarn. By beginning and ending each row with the first yarn, you are creating a border. Continue alternating colours and end the row by knitting the five stitches of the border.
Turn your work as if to begin purling. Examine the back of the work and how the stitches lie. Because each stitch is an alternating colour, loops form between them. These loops are referred to as "floats." It is important to allow just enough tension on the yarn as you knit so that the floats are loose enough to allow the fabric to stretch slightly, but not so loose that these loops dip down past the previous row.
Experiment with different stitch sequences. Abandon the checkerboard pattern and try stitching up to five stitches at a time with one colour before switching colours. Five stitches is the recommended limit, though. If you knit more than that, then resume knitting with the other colour, the float will likely be too long.