A compass is the best low-tech navigational instrument you have on board. To work well, it needs to be installed properly and understood. For a steering compass a minimum of 12 inches of interference-free space is required when mounting.
Understand the difference between "true" North and "magnetic" North.
While it might seem confusing that there are two kinds of "North," it's a basic distinction that you can learn quickly, and it's an essential piece of information to learn to use a compass properly.
True North or Map North refers to the point at which all longitudinal lines meet on the chart, at the North Pole. All charts are laid out the same, with True North at the top of the chart. Unfortunately, because of slight variations in the magnetic field, your compass won't point to True North, it'll point to Magnetic North.
- Magnetic North refers to the tilt of the magnetic field, about eleven degrees from the tilt of the Earth's axis, making the difference between True North and Magnetic North different by as many as 20 degrees in some places. Depending where you are on the surface of the Earth, you'll have to account for the Magnetic shift to get an accurate reading.
- While the difference may seem incidental, traveling just one degree off for the distance of a mile will have you about 100 feet (30.5 m) off track. Think of how off you'll be after ten or twenty miles. It's important to compensate by taking the declination into account.
With every compass, two adjustments are required when reading a bearing: variation and deviation. Failure to account for these will skew your position estimates. Deviation is compass-specific. It includes errors produced by metal and electronics around the compass on your boat. Variation is the changes in the earth’s magnetic field that occur naturally over time and location.
School of Sailing offers a very good explanation of true and magnetic north here if you want a more detailed discussion.