Circular needles are usually used for larger circular knitting, and then, if the piece tapers down so it no longer fits on the circular needle, you can switch double pointed needles. Yes, they are interchangeable in this way; you can switch from one to the other if you want to.
All circular knitting follows the same concept, where you knit around and around. There are numerous ways of doing this. Most people use circular needles for the larger pieces and DPN's (double pointed needles) for the smaller pieces. You can also use circular needles for smaller knitting. Check out the "small diameter" circular knitting methods listed on the Advanced Techniques page for these methods, in addition to using DPN's.
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