The best way is what works for you
Just like your eating and your exercise, the way you measure progress should be individualized. Some people use the scale, others measure, others judge by how their clothes fit...it's all in what you feel comfortable with.
Yes, the scale can vary a lot...but so can the other ways. Lots of different things can affect the results.
I weighed daily in the beginning, which was cool when the weight was coming off more quickly. However, I'm now 4 pounds from goal and it's a lot slower coming off, so I weigh weekly. And I skip the week of my period and sometimes the week before, because it's just too flukey then. I do it in the AM before showering but after using the bathroom (every little bit helps!).
There is no right answer. Think about how you want to measure your progress and how often you are willing to devote your emotional energy to the scale...how much it will affect the rest of your day if a good/bad number comes up. If the answer is a lot, then weigh less often. If you can shrug off a disappointment and move on and want detailed info, weigh daily. Do whatever gives you the most peace of mind.
"If you drop an egg, you don't say, 'Oh, shoot' and drop the other 11, do you?"
-Source unknown, but obviously brilliant
Reached goal 4/16/2010...but kind of afraid to look these days