Transfer Methods

Transferring a design to fabric is the first step in most areas of needlework. No method is perfect, and each is better suited to certain fabrics and uses than others. Following is a list of the most common transfer methods (that I know about), how to use them, and the pros and cons of each. I've attempted to make this as comprehensive as I can, but there's always more to learn.
Transfer Methods
1. Purchased iron-on transfers
2.Transfer pencil (to make your own iron-on)
3.Trace or Draw
4.Fabric Markers
5.Chalk and soapstone
8.Embroidery Stabalizer

1. Purchased Transfers
These are easy to use and they are often reusable - just follow the manufacturer's instructions. The disadvantage is the designs can be limited and they are typically for light coloured fabrics only

Tip #1: Use a quilting ruler to centre a design and make sure that it is even with the fabric edge.

2.Transfer Pencils
Using this type of pencil and plain tracing paper, you can make your own iron-on transfer.
Place the tracing paper over the image you want to copy. Press firmly as you trace the design with the transfer pencil. Remember: When you turn the tracing paper face down onto your fabric, you will end up with a mirror image of the design you traced. If you want the final image to face the same direction on the fabric as it is on the original, trace the design on the back of the tracing paper with a regular pencil first, then flip it over and trace the design with the transfer pencil.
Pin the design, transfer side down. Use a hot iron (wool setting) but no steam. Lift up a corner occasionally to check your progress. If it isn't marking as clearly as you would like, go over it with the iron a little longer. Be careful not to scorch your fabric.

Transfer Pencil PROS:

It's inexpensive, easily found at fabric stores or from various online shops.
It broadens your design options - if you can trace it, you can stitch it.
The marks wash out easily.
Doesn't require special paper. Regular tracing paper works fine.

Transfer Pencil CONS:

The tip doesn't hold a sharp point very long, so large designs can require constant sharpening to keep details from getting blurry.
It also requires a fair amount of pressure - complex images can take a while and be hard on your hands and wrists.
This method is for light-coloured fabrics only. The pencil only comes in red.

Tip #2: To make sure the design on the fabric is facing the same way as the original, trace the design using a black pen. When you're finished, turn the sheet over and place another sheet of tracing paper over it. Trace the image again.

Using the second sheet of tracing paper simply makes it easier to see the image areas that have already been traced - you're less likely to miss a spot. This is only really helpful for large or complex designs.

Tip #3: Trace the design with strong dark lines so they won't get lost in the weave of the fabric. Details can sometimes be difficult to distinguish from fabric fibres.

Before you begin: Unless your fabric is transparent enough to allow you to clearly see the underlying design without being back lit, you will need a light source of some kind behind your design and fabric.

The best is a light box. They're generally portable, tabletop boxes with a fluorescent light or two under a plexi glass top.

These can get expensive, but there are some cheaper around

The only drawback is the small size of the lighted area. (Depending on the size of your design, you might need to shift your work six times and trace it in sections.)

The larger the lighted area, the more expensive the box.

If a light box isn't an option, a large well-lit window works, but it's awkward since you've got gravity working against your arms and the fabric!

Using wide masking tape, attach the design to a lighted surface.
Tape the fabric securely over the design.
Trace using whichever tool you like best - I'd recommend a HB pencil 

4. Fabric Markers
Water Soluble: These markers are usually blue and will disappear after getting the fabric wet. It isn't always necessary to wash the item to remove the ink. 

Soaking the piece or spraying it with a water bottle and letting it air dry works fine on most fabrics. 
The ink may fade from air humidity or moisture from your hands, but isn't removed completely until it becomes wet.

Air Soluble: The ink from some of these pens disappears within 24 hours. How many of us can finish a project in 24 hours?! 
I have heard that keeping your project in a ziplock bag can make the ink last longer.

5. Chalk & Soapstone
Most fabric pencils are made to brush off the fabric - as does the soapstone marker. Others may require washing.

Soapstone can be sharpened like a pencil, allowing you to make very fine lines. It has a removable holder and needs to be sharpened with a hand-held sharpener. The markings stay on for a long time, much better than chalk, but rub off with a piece of cloth.

6. Pouncing
The pouncing powder (or inking powder) can be found at art supply stores. 

For dark fabrics powdered white chalk will work.

After tracing an image, pin the paper to a piece of felt or a couple of layers of fabric. Use a tapestry or yarn needle (or similar sharp, pointy object) to poke holes along the lines. You want a hole large enough to let the powder through, but not so large that you'll end up with smudges instead of dots on your fabric. Also, make sure the holes aren't too close together or the paper might tear.

Note: You can poke holes in the tissue while it's attached to the final fabric (with a fabric pad or piece of felt underneath). You'll save a step by not having to take the tissue from the felt and then attaching it to your fabric, but you also may end up putting unnecessary holes in your fabric.

Take the tracing paper with the poked holes and pin or baste it to your fabric.
Using a small make-up brush, cotton ball, or bit of felt, gently dab or rub the pouncing powder over the design.
Remove the paper and gently remove any excess powder. At this point you can try to embroider over the powdered lines, however, connecting the dots with a fabric marker or pencil will ensure a design that lasts as long as you need it to.

7. Tacking/Basting
This is another method that would work well for large, simple images, but might be cumbersome for detailed, complex designs. It is the best option for transferring a design to a sweater or onto napped fabrics such as velvet or felt. And, if you baste the design onto the fabric using thread that is the same colour as your floss, you would end up with a colour-coded pattern. That could be helpful.

First, draw/trace your design onto tracing paper, tissue paper or stitch-n-tear stabilizer. Then, using a loose running stitch (basting), stitch over the design and then tear away the paper.

8. Embroidery Stabalizer
See my tutorial for transferring designs onto dark fabrics, felt and wool

In conclusion...
There is no "best" or "right" way to transfer a design to fabric. 

Experiment to find what works best for your project