When and why to swatch?
I'm going to be honest. I hate swatching. When I'm making a shawl, I just make sure I like the density of the fabric and measure off the finished piece. However, when it comes to garments swatching is essential to making sure the garment fits properly when it is finished and blocked.
Swatching for shawls is useful to make sure that the design has the right density but usually it is ok to get the gauge close even if it is not perfect. For project that need to fit, that is not the case.
Why is the correct gauge important for fit? If you are not getting the same gauge your finished garment will be either too big or too small compared to the intended size. Here's an example: For a garment where the gauge should be 16 Tss and 16 rows per 4"/10cm, if your swatch is 18 Tss and 18 rows per 4"/10cm and you are making a size with a finished chest of 50"(125cm) the final chest size you would actually get is 45"(110cm). For that same sweater the armhole depth is supposed to be 10.5"(25cm) but would end up being 1"(2.5cm) smaller and likely fit a bit too snug in the arm. If you're making something that requires as much time and effort as a garment, spending a little time to gauge is well worth it.
How to swatch:
How to swatch is important. If you don't do it properly, you won't get an accurate measurement of your gauge.
1) A gauge swatch should be larger than what you will need to measure. If the pattern calls for a 4"/10cm swatch you should do enough stitches and rows to make at least a 5"/12.5cm swatch. You do not count your edge stitches when doing your measurement.
2) Use the stitch pattern described in the pattern. Different stitches have different characteristics (height, stretch) and that can affect your gauge.
3) Block before measuring. This part is especially crucial. You must block your swatch in a similar manner to how you will wash your garment so the measurements do not change the first time you wash it. Block your swatch and allow to completely dry before measuring. It is helpful to measure both before and after blocking so that while you're working your project, you can periodically check to make sure you are staying consistent. You can also use this to know roughly how much your item will grow when you're finished.
What if your gauge swatch is the wrong size?
1) Change the hook size. If you have too many stitches and rows in your swatch, go up a hook size. If you have too few, go down a hook size.
2) Change the yarn. Sometime the yarn just won't work. When you find the best hook size, the density of the fabric is too thick or to airy.
You may be tempted to just make a different size, but a well graded pattern does not grow all of the parts at the same rate. While there is 30"(75cm)+ difference between the smallest and largest finished chest size in adult women's patterns. The difference between the smallest and largest neck is only 7"(18cm). Going up or down one size is not a big deal, but going up or down several will result in a poorly fitting sweater.