This stitch is so called because, each loop in the chain is formed by using the process to make a knot. The loops formed are circular in shape unlike the ‘almond’ shaped chain stitch loops. This stitch is ideally worked from right to left. Once you are familiar with the logic, you can work from left to right as well.

I will be working on a single stitch line. The stitches will fall on either side of this stitch line, except the first one.

knotted_chain_stitch_1   knotted_chain_stitch_2
Fig 1: Bring the needle out through A, which lies on the stitch line. Now take the needle in through B and bring it out through C. Note that the points B and C lie on either side of the stitch line and symmetrically.   Fig 2: Pull the needle out to get a small stitch as shown. Take the needle beneath that stitch from the top, as shown.
knotted_chain_stitch_3   knotted_chain_stitch_4
Fig 3: Pull the needle out to see a loop being formed. But before the loop is tightened, put the needle in that loop. This is the process that makes a knot.   Fig 4: Remember not to tighten the loop too much, else it will make a knot. It must still maintain the look of a circular loop. A tip to help you here: when pulling out the needle to tighten the knot, pull the needle towards the left side. This helps the loop to nt fall into a tight knot.
knotted_chain_stitch_5           Fig 5: Continue the procedure by making such tiny circular loops in the same way.
Fig 6: A finished line of knotted chain stitch would look like this.