Suppose I've convinced you that charts are handy and not intimidating -- in fact, you're so convinced that you'd like to make your own charts. How would you go about doing that?
The process you're going to want to employ will vary somewhat depending on whether you want to make a stitch chart, as for lace or other textured knitting, or a color chart, as for intarsia or stranded colorwork. However, there are some common factors that we can discuss first.
In order to make your chart a more accurate representation of the knitted item you will produce, you need to account for the way knit stitches are shaped; the more representational and less abstract your design, the more this will be true. Most of the time, knit stitches are wider than they are tall; you can see this reflected in common gauges, such as the common gauge for worsted weight yarn of only 5 stitches per inch horizontally, but 7 stitches per inch vertically. Therefore, if you prepare a chart on a graph of squares, the design it shows will be taller than the design you will actually knit. To compensate for this, knitter's graph paper uses rectangles instead of squares. The common printed paper uses the worsted gauge I just mentioned; however, there are numerous sites which will let you print custom graph paper that matches your gauge for your project. I like the paper from this site, but there are many sites which offer similar free products.
There may be circumstances where this rectangular stitch shape does not apply, depending on your gauge. In particular, stranded colorwork may pull in horizontally to such a degree that the stitches do become square, so that the use of square graph paper is appropriate. This may even be a desirable feature, such as when a knitter wishes to use a chart originally developed for needlepoint. Swatching in a geometric pattern of similar density is very helpful when planning this sort of design. Also, if you are going to be felting your design, keep in mind that felted knitting does not shrink evenly, but usually shrinks more lengthwise than widthwise; this means that you need to use the felted dimensions to determine your aspect ratio, not the knitted dimensions.
In addition to determining your aspect ratio, swatching will let you determine how many stitches you have to play with as your total canvas. A chart for a bulky sweater at 4 st/in may be only 80 stitches wide, for instance, while a chart for a sweater of the same size at 8 st/in will be 160 stitches wide and can incorporate much more detail.
Let's start by talking about creating charts for textured knitting. I'm going to give this subject somewhat short shrift, simply because it's been covered in detail by a couple of great sources to which I will refer you. First, for charting textured designs generally, Kim Salazar of WiseNeedle (a fabulous resource, by the way), has done an excellent series on charting, covering in detail such things as symbols, that pesky no-stitch box, designs which are difficult to chart, and much more. More specifically, for cabled designs, Eunny Jang demonstrates unventing a cable, or translating a cable from a knitted piece to a chart you can use, and a similar technique could of course be employed starting from a sketch instead of a knitted piece. Also, let me digress a bit, and suggest that if you are at all interested in creating your own lace patterns (or even in knitting someone else's), Eunny's Majoring in Lace series is an absolute must-read. Simply brilliant.
Those resources will set you up nicely for creating charts by hand, but what if you want to make a chart that you can share electronically, or drop into a pattern to be printed out? You'll need some way to lay out your symbols electronically. There are many ways to do this. Kim uses Visio, and she has made her Visio templates available; please respect her copyright restrictions as described. Eunny uses PhotoShop, in a process which she describes here. Note that both of these designers use square blocks; this is usually fine in texture knitting, where the patterns are only somewhat representational, but you probably want to at least be conscious that some distortion exists and ask yourself whether it makes a difference in a given situation. I'm thinking about changing to a similar process, but currently I use the Aire River Design knitting font, in a Microsoft Word table. To set up the table, I: (1) create a table with the number of rows and columns of stitches I wish; (2) use the table properties menu to set the cell margins to 0, vertical and horizontal alignment to center, and the row height and column width to match my aspect ratio (for instance, if my aspect ratio is 1.4, and my row height is 0.2", my column width will be 0.28"); and (3) set the font for the entire table to the ARD font. I then use the keyboard layout diagrams that come with the font to type the characters into the cells. It's kind of low-tech, but it works.
Now, let's turn to color charts. For simple designs, these are pretty easy to create, either by hand or with your computer. To create a chart by hand, you simply take graph paper of the appropriate aspect ratio, and color in the blocks as you wish the stitches to appear. To create a chart on the computer, you'll need to create a grid or block system in some manner, and then fill it in. You can use the same sort of table setup in Microsoft Word (or, most likely, any other word processing software) that I described for texture charts above, and use the Borders and Shadings tool to color in the cells; I'm sure there are other methods. Do keep in mind that a single stitch can be only one color as knitted, so you can't have partial blocks.
For block letters or simple geometric designs, this is probably the fastest way to get the job done. However, this block-by-block process is going to be tedious for large designs, and is not very well adapted to creating a chart from an existing design, which is something many people will want to do. How do you turn an image you already have into a chart?
If you have the image only as a hardcopy and don't have access to a scanner, or if you just want to do it by hand, you can. There are a couple of methods you might try. The quick-and-dirty method would be to use a photocopier to copy your image into your graph paper, and then do some cleanup around the edges, deciding which color partial blocks need to be; of course, if your design is in color, you'll need a color copier to do this. If you don't have access to a copier (or not to a color one if you need one), you can hand-color your blocks using a tracing method, rather than transferring and then cleaning up. To do this, you'll want to have your design on one piece of paper, and your graph on another; you may need to use a copier to shrink or enlarge your graph so it's the right scale for the level of detail in your design, or use a program such as this custom paper generator to create paper at the right scale (this is not as user-friendly as the other paper source I provided, but it's more robust). Place the graph paper over the design, and then tape both sheets to a window, a lightbox if you have one, or a glass table with a light placed underneath, and color in the blocks to transfer the design.
If you have the image electronically, there are several methods you can use to adapt it, and we'll look at a few. If you have PhotoShop, or other graphics software of similar capabilities, this article by Tina Yeung for Knitty is helpful. However, it has one flaw: it does not account for the aspect ratio of knitted stitches. If you're going to work in a stranded method, and you've swatched to determine that your stitches will be square, or if your design is sufficiently abstract that a slightly squashed appearance will not detract from it, then you can use this method as-is; if neither of those is true, then you will want to alter the aspect ratio of the image so it appears taller/thinner, before converting it. To do so, after step 2 but before step 3 of Tina's method, turn off the "constrain proportions" option (which keeps your aspect ratio constant), divide your stitches by your rows from your gauge swatch, and reduce the width of the image to that percentage, while holding the image height constant. For instance, if your gauge is 20stsx28rows, your ratio is 0.71, so you would set the image width to 71% while holding the height at 100%. Once you've done that, you can turn "constrain proportions" back on, and proceed. Your charted image will have a vertically stretched appearance, but it will knit up to look like the original.
There is also software that will convert your image; one example is knitPro from microRevolt. This product has recently been upgraded, and is now fairly robust, but it doesn't allow you complete control. It does now handle a standard 5x7 aspect ratio; if your aspect ratio is different from that, alter the width of your image before putting it into knitPro, and then use the 1:1 aspect ratio option. It also offers three grid sizes; if you want a grid that's between two sizes, use the larger size but add a plain border around your image before feeding it in, to occupy the excess squares. KnitPro won't give you perfect results for all situations, but it's a nice little tool within its limitations.
If you have less robust graphics software than PhotoShop, and knitPro doesn't work well for your image, you can still do an electronic version of the lightbox tracing method. Create, as a separate image, a grid of the appropriate aspect ratio. Open your image, and paste this grid over it. Use the image editing tools in your software to clean up blocks at the edges, so that each block is a single color. This method is considerably more tedious than the PhotoShop method, but it can be done in software as simple as Microsoft Paint, so it's something anyone should be able to do.
There are undoubtedly more methods than I've described, for both texture and color charts. If you know of an interesting one I didn't cover, please let me know!