Here's a thread devoted to tips and tricks you use to know if your knife is sharp or not.
This sounds simple, but can get very complicating when we start involving many different grits and techniques. Let's stick to the basics for now, and hopefully this thread develops into something more advanced. So, onto the basics.
How do you know if your knife still has a decent, "functioning" edge? The number one trick I like to use is the back of my fingernail. Your thumbnail is the best one to use. Gently place the knife's edge on your nail. If the knife edge sticks to your thumbnail, you know the edge is still functioning. You can still hone the edge back to razor sharp fairly easy. If the knife slides around your thumbnail, you know the edge is completely rounded beyond simple honing. At this point you need to break out your coarse stones and start building a slurry.
Just because a knife sticks to your fingernail doesn't mean that you have a great edge. You merely have a functioning edge. Ultimate sharpness is determined many other ways, but ultimately up the discretion of the user.
There is the "Murray Carter 3-finger method", which involves taking 3 fingers and spreading them over the length of the blade, then seeing if your fingers slide or not. This sounds very dangerous, but believe me, and Murray points this out, you will instinctively stop your fingers before they get cut, and placing 3 fingers down distributes the weight evenly, lessening the chance of a cut. When your 3 fingers stick you know you've "reached the edge" while sharpening. If your 3 fingers don't stick then you must go back down to a lower grit. This test will be a little more accurate than the fingernail test when you get towards the higher grits, but can be painful if you aren't very careful.
Another test is cutting a folded paper towel. This is great to use at lower grits to let you know you've reached the edge. Even a 120 grit edge will cut a folded paper towel on the cutting board, that is, if you've reached the edge. At this point you can move onto a finer grit.
I can go on, but let's let someone else jump in!