Flat Bind Off method
This method is the same as the Basic Bind Off used with needle knitting. You start by knitting two stitches, then pass the loop of the first stitch over the second stitch. Knit one more stitch, and pass the previously knit stitch over it. This gives a nice braided look to your bound off edge, and you can control how snug or stretchy the edge is by the tightness or looseness of the loops on the bind off row.
For clarity, I knit the bind off row in a different color. (Click on the pics to see them larger.)
Step 1: Wrap and knit off pegs 1 and 2.
Step 2: Move the loop on peg 2 to peg 1.
Step 3: Knit off peg 1 (bring the bottom loop over the top loop).
Step 4: Move the remaining loop back to the empty peg. This peg is now peg 1.
Step 5: Wrap and knit off (the new) peg 2. (Note: this is where you control the stretchiness of the bound off edge -- the tighter the loop, the less stretch you will have.)
Step 6: Repeat steps 2 - 5 until there is one loop left on the loom.
Step 7: Wrap the peg with the loop on it and knit off. Cut the yarn, leaving a 6" tail. Take the loop off the peg and pull on it until the cut end of the yarn comes through. Continue pulling until the loop is closed snug against the knit fabric.
BTW, to put the braid of the bind off on the wrong side of the knitting, purl the pegs in steps 1 and 5 instead of knitting them.