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The word is correctly pronounced with a short "i" to rhyme with "tinned", rather than to rhyme with "finding". It has been suggested that the word derives from the practice of using the prevailing wind to assist with the turn, but no verifiable reference has been quoted for this suggestion. However, nowadays, both pronunciations are in use. In German the term for turning a vehicle is "wenden"; this suggests Germanic origins of the pronunciation.
Because the width of a canal channel (about thirty to forty feet) is less than the length of a full-size canal boat it is not usually possible to turn a boat in the canal. Winding holes are typically indentations in the off-side (non-towpath side) of the canal, allowing sufficient space to turn the boat.
One unverified suggestion for the derivation of the name winding hole comes from the fact that the winding hole is on the off-side of the canal. When horses were used to pull the boats, it was not possible for them to assist with the turning of the boat, due to being on the wrong side of the canal. As a result it was considered favourable to use the wind to assist in turning the boat, to reduce the amount of human power needed.
A winding hole usually consists of a "notch" in the canal bank opposite to the towpath. A turning boat inserts its bow into the notch and swings the stern round. In the days of horse-drawn boats this was presumably accomplished using long shafts.  
With the growth of pleasure traffic on the canals and the virtual disappearance of commercial craft the need for winding holes increased. Whereas commercial craft needed to turn at locations which were predictable and related to the goods carried, pleasure boats may wish to turn anywhere. As a result British Waterways has created new winding holes in many locations over the last twenty years. For example, three have been provided in the ten miles of the Oxford Canal between Braunston Junction and the foot of Napton Locks.