I am a good reader for a guitarist, which is a bit like being a fast car for a 4 cylinder engine. In general, guitarists do not read as well as other musicians. There are lots of suggested reasons for this, but they don't really matter. It's just true.
The good news is that there are plenty of exceptions to the "guitarists can't read" rule. Some guitarists read fabulously well. So it certainly is possible to read well on the guitar.
My guess is that the best sight readers are those who grew up reading music. They learned the language of music as children, at a time when their brains were hard-wired to accept new languages. The language of music (notes, rhythms, time signatures, etc.) is absorbed easily along with their native tongue or other languages.
Those who did not grow up reading music can still learn to read. It might just take more time. The path to being an excellent reader is long. The path to being just a functional reader is relatively short. The beauty is that you can stop at any point; any time you put in learning to read music will make you a better musician.
Learn by Doing
Anyone can be a good reader simply by reading music. This is one of those "just do it" things. You simply need to read music regularly for some period of time to develop a fluency.
You can stop at any point along the line. If your interest is in simply learning to read well enough to buy music to play at home for yourself, you can acquire this level of skill quickly. If your interest is to be able to read the Walton Bagatelles at tempo at sight, you have years of work ahead of you.
See, Recognize, Prepare, Play
To read music at sight, requires four skills to work together. You must: See the music. Recognize the music. Prepare to play the music. Play the music.
Your eyes see the music and turn the different light patterns into shapes which are passed along to your brain. Your brain processes the shapes, recognizing what each shape represents (e.g. a whole note F). Another portion of your brain then prepares the motions to be performed by the body to play the F. Your body executes the motions to play, and the F is played.
Recognizing music is the key to reading well.
When you recognize a face, you do not have to think "hmmm, long nose, brown eyes, high cheekbones... SALLY!" You simply see Sally's face and recognize her.
With music it becomes the same way. You do not think to yourself "C E G C E . . . 3rd fret 5th string, 2nd fret fourth . . . . C CHORD!" You simply see the 5 notes on the staff and your mind immediately knows what chord it is and how to play it. It is not difficult to develop this skill; our minds are well designed for recognizing patterns. After seeing this particular chord several times, you will know it at sight just like you know Sally's face.
Read the following sentence aloud:
In order to be able to play what is about to happen, you must know what is about to happen.
Did your eyes reach the last word before your mouth said it? Most likely, they did. Your eyes slid easily across the line, and your brain took in the words before your mouth said them. This is the same skill that you must develop when reading music. It is not particularly difficult.
To read music smoothly, your eyes must be focused ahead of the beat. When you focus ahead of the beat, you are able to anticipate what is about to happen. This small amount of anticipation allows your brain to recognize and prepare the notes that are about to be played a split second before your nervous system sends out the signals to the hands to play. This quick recognition of what is about to be done allows the music producing circuits to prepare the motions necessary. The result is a smooth sound from note to note.
If you doubt that it is necessary to focus your eye ahead of the beat, read the following sentence aloud, but as you read, focus your eye only on the word you are currently saying:
It sure sounds choppy when I read aloud this way.
Anticipation of the coming notes is key to producing music smoothly at sight.
How far ahead you will focus will vary considerably depending on the tempo of the song and the actual pitches and rhythms to be played; sometimes one beat ahead will suffice, sometimes a measure ahead is necessary.
The finest readers read ahead several bars, recognize the music, then play it while they look at the following bars, or look up at a conductor to follow the time.
Learn to Read by Writing
An invaluable way to learn to read music is to write music. The simple act of writing music on paper will improve your ability to read music. Copy a Bach piece by hand to a piece of manuscript paper. Imagine the music in your head as you write it down; try to hear the pitches and sing the rhythms to yourself as you write. Play parts of it on the guitar every couple of minutes to see how it sounds. This will link the notes to your fingers and your ears.
Writing out music in this way will train your mind to recognize the symbols of music.
An interesting experiment to try: Hand copy a different piece of music every night for a week, imagining the music as best you can while you copy. You should copy pieces you are familiar with and pieces you are not familiar with. Do not practice sight reading at all for the week.
At the end of the week, sight read a piece of music, and you will see that your reading skills have improved because you will be more fluent in the language of music.
Reading in an Ensemble
Don't get lost.
The single most important thing to do when playing with an ensemble is to maintain your place in the music. If you can simply keep your eye moving along the page with the beat, and know exactly where the ensemble is in the music at any instant, you have mastered the first rule of ensemble reading.
If you are playing in an ensemble of 2 and get separated, it is usually fairly simple to reconcile the difference and move on. With 3, it gets harder in some ways, easier in others. As more and more musicians are added, it gets both easier and harder when you get lost.
It gets easier because there are more people to rely on. You hear the steadiness of the pulse more, so it is easier to stay together. It gets harder because if you get lost, you may have a harder time finding your way back.
If you are playing in an ensemble with a conductor, keep an eye on the conductor's hands. The conductor's job is to keep everyone together.
Sight editing is a handy trick for ensemble sight reading. Suppose you are sight reading parts in an ensemble, and as you look ahead you see a particularly difficult passage. You will not be able to sight read it. Don't panic. Remembering that the most important task in ensemble playing is to not get lost, the trick is to sight edit. In simple words, you just skip the offending passage without losing your place in the music, and you will come out just fine on the other side.
As you get better at sight editing, you will learn to play portions of difficult passages. A fast scalar passage ending on a chord becomes a couple notes of the scale and the chord. It isn't perfect, but you won't get lost in the music, and often nobody will notice, because they're all too busy reading their parts too.
If you would like to practice not getting lost, go to the Music Page of timberens.com. There you will find performances and sheet music for a variety of songs. Listen to the songs while you follow along with the sheet music. See if you can keep your eye on the beat in the music. Remember: don't get lost.
Finding Music to Read
To sight read, you need music to read at sight, which requires an endless supply of new music to read. Fortunately, finding good source material is simple, both inside and outside of the standard guitar repertoire. There are thousands of study books for other instruments that will provide good reading material for guitarists. Particularly good are books for violin and clarinet, as their ranges are similar to the guitar.
The computer world is providing us with a nearly endless source of music for sight reading. Websites abound with music that you can download and print out. Spend an hour or two, gather and print 50 pages of reading material and set it on your music stand. If it is there and available, you will be more likely to read it.
Use sight reading to warm up. Place a collection of simple music (however you define simple) on the stand and read it slowly for 10 minutes before beginning your daily practice. Move your fingers slowly and fluidly from note to note. You do not have to be constantly reading brand new music. Cycle the pieces back every couple weeks. Note how much easier the piece is to read every couple of weeks.
Just start reading. It isn't that hard, and it will make you a better musician.