The best way? By sleeping, eating, and breathing with your guitar 24/7! :D

Good question though, because it's hard to explain!

I would say this is a mixture between bluegrass technique (fast picking and lots of pull-offs and hammer-ons) and funk technique (all the loose stuff where his hand is off the guitar).

I would check out some really good funk players and practice "skank" technique, which means hitting single notes with BIG moves with your hand (you have to be really good at muting the strings you don't want to sound with your fretting hand).

I don't know if anyone played like this (not the bluegrass stuff) before Hendrix, but he's the first I've seen. Check out Killing Floor at the Monterey Pop Festival in 1967:

http://www.youtube.com/watch?v=ifIkNi6Ei6Q

He plays like this in many other songs too.

To sum up: Bluegrass and Funk mixed in a bluesy way!