As a guitarist you may be faced with a chord progression that looks like this:
Bb Gm Eb F Bb Gm Eb F F Ab Eb F
This may have come about either by having to transpose a song, or because this was simply the original key. If you are an acoustic guitar player, you may not want to have to deal with all of those bar chords. In general, the acoustic guitar "sound" features a lot of open strings and typically uses a different technique than that of an electric guitar. The solution is to use a capo.
A capo is a device that essentially creates an artificial nut at the fret where it is attached. In order to use it, you must first decide on what key you would rather play in other than, in this example, the key of Bb (which is not a particularly friendly "acoustic" key). Let's say that you would like to play this song in the key of "G". Where do you then place the capo? Use your knowledge of the Chromatic Scale to tell you.
G G# A A# B C C# D D# E F F# G
I started the Chromatic Scale with "G" only because that was the key that I wanted to play in. I also only included the sharps (#), and not the flats (b) because the key of "G" is considered to be a "sharp key". Now underneath it, I put another Chromatic Scale starting from the key that the original progression came from -"Bb". The key of "Bb" is a "flat key".
G G# A A# B C C# D D# E F F# G
Bb B C Db D Eb E F Gb G Ab A Bb
This now gives you two things. Using a direct down-up substitution gives you the chord substitution from the bottom key to the top key.
G Em C D G Em C D D F C D
Count the number of half-steps from G (the key that you want to play in) to Bb (the actual key).and you will get 3. Knowing that each guitar fret represents a half-step tells you where to place the capo - on the 3rd fret.
Placing the capo on the 3rd fret allows you to play in the key of G while actually BEING in the key of Bb.