I'm on my second run through from the ground up teaching reading.
My general method goes something like this:
I spend lots of time teaching the letters, their sounds, various ways they look, and getting the child really comfortable with them. This stretches from toddlerhood to about 3-4.
We spend lots of time reading out loud. Picture books, chapter books, anything and everything. We attend story time at the library for more oral reading exposure. Infancy- childhood.
I also spend time on oral blending games and rhyming. For example, "C AAAAA T says what?" When they can hear the separate sounds and blend them together, we're ready to move on. I also think that rhyming is very important. Lots of silly songs and nursery rhymes help develop the ear for this. We work on this from the time they talk well until it clicks- about toddlerhood- 3/4.
After they can do the above easily, without stress, we start working on reading words on paper. I start with short vowel words, specifically short A words. I also introduce a very few "helper" or sight words, but I also explain the phonetic sense behind them. I believe that too many sight words leads to troubles later on. This has happened between 3/4 for both of my girls.
When they can confidently read CVC (consonant vowel consonant) words, we move on to digraphs and more complicated words. This is the most variable part- Sweet Pea blew through phonics as a whole in less then a year and was able to read on a meaningful and good level in that time. Little Bird hasn't moved to this phase yet, so I don't know how quickly she'll progress.
After this I address reading a little differently- I enforce reading time throughout the day. This falls in three categories- books I read to them (even after they are fluent readers), books they read silently to themselves, and books they read out loud to me.
Having a child read out loud allows you to keep up with combinations that they are having issues with. It also lets you catch sloppy habits, mistakes, and can clue you in on vision issues. I think it also helps self confidence.
Reading out loud to a child who reads well allows you to read books together that they might not pick up on their own. It also allows you the chance to stop frequently and discuss vocabulary and themes, look things up on maps and check comprehension without tossing out worksheets.
Silent reading is important here, too. It lets you assign school reading, helps reinforce the idea that reading is pleasurable and a worthwhile use of time, and builds the volume of ideas that they carry around. A widely read child has images and vocabulary bouncing around that will benefit them indefinitely.
When is a child reading? This is pretty hotly debated. Some people say their child is reading as soon as they sound out or recognize that first word, others wait until a child can pick up a book, decode the letters and tell you what they just read. I fall kind of in the middle. I don't call a child who can pick a few words out or blend a few words a reader. That misses the nuances of being able to use language. I also don't wait until they are able to pluck a book from the shelves and use it meaningfully, either. I would say that my four year old can read- she can pick up an easy reader, sound through all the words, and then retell the story.
But this is the beginning, not the end.