The type attribute of a headline determines how it is rendered by the content management system. There's a template for each of the built-in types, but the type system is totally extensible. You can create your own templates, and thereby create your own types.
There are five nodetypes implemented for content management: html, outline, blogHome, presentation and markdown.
Use the Edit Attributes dialog to set the type of a headline. Click the + button to create a new attribute. Here's a screen shot that illustrates.
When Fargo renders a page, it's because it has one of these types, or it's the parent of one of these pages. Those pages don't need to have a type. If they don't it's rendered as an index page, using the outline template, and it contains an indented list of pages that are underneath it.
The outline and markdown types pass through the markdown processor. Custom types also flow through the markdown processor.
Use the markdown type when the contents of the sub-outline is pure markdown. If it's a structured outline, and you want indentation to work properly, use outline type.