Set up the loom for the size of rug you want to make. If this is your first attempt at a hand knotted rug then start out with a smaller loom. To set up the loom, will wrap the base strings around the frets in the loom. String enough yarn to generate the width that you want the rug to be.
Select the pattern that you want to create. The simplest design is a plain pattern created using only one color. Another simple design is to create multicolored stripes. It is important that you plan out the design prior to starting the knotting. To create a written pattern for a striped rug design simply write down how many rows each stripe will be and then list the order that the colored stripes will appear.
Start the first row by sliding a long piece of yarn under the far right base string and pull it through until there is just a short tail left. Loop the yarn over the base string and tie a knot pulling up at the end to keep the knot as high as possible on the loom. Then slide the same string under the next base string to the left, pull the string until it is tight, wrap the string around the base string, go over the top of the knotting string to create a loop, then create a knot by pulling the knotting string under and through the loop, pulling up at the end to draw the knot to the top of the loom. Repeat the process for the remaining base strings.
Begin the next row by repeating the above process with the same string you just used to create row one, or by starting with a new string. Work from left to right keeping the knotting string tight and high. Follow the pattern in regards to what color yarn to use for each row.
Finish the rug by turning the loom over and cutting the string in the middle of the back of the loom. Then tie a knot at the end of each base string to prevent your rug from slipping off the base strings. Tie remaining base strings into tassels and cut to an appropriate length.