The are many different ways to make a soft switches.
This instructable shows another option of a very quick prototype for the soft switch, using an aluminum tape instead of conductive fabric, and solid wires instead of a conductive thread, which both of them, the thread and the fabric are the best materials for really soft switches. But more expensive which I wanted to avoid in this prototype.
Step 1: Materials
1. Thin sheet of foam
2. Any non conductive fabric
3. Aluminum tape
4. Solid or stranded wires; 3 different colors
7. Sawing needle and thread
8. Arduino board
9. Simple LED
Step 2: The Foam and the Fabric
First cut 2 even pieces of fabric, 2 squares or any other shapes that you want ( make sure with the multimeter that it's actually not conductive).
Cut the same shape of the foam sheet and cut a hole inside of it, not too big.
Step 3: Attaching the Aluminum Tape and Soldering the Wires
Cut 2 strips of the aluminum tape (should not be bigger then the foam piece) and tape it on the fabric pieces. Each fabric piece one aluminum tape piece.
Strip the wires and solder the striped edges on top of the tape.
Solder the red wire to one piece and the black and the blue wires to the second one. You can use any colors combination just make sure to differentiate the single wire as a power wire and the side with two wires as ground and input.
Use the multimeter to check that there is conductivity between the wires and the tape.
To make sure that the wires will really attached, cut small pieces of the tape and attach them on top of the soldered wires. Warm it a bit with the solder to solder all the tape pieces.
Step 4: Finishing the Switch
Last step is just put all the pieces together.
Place the foam piece on between the two taped fabric pieces (like a sandwich)
and saw them together, or just staple the edges as long as you not touching the aluminum tape.
The switch is ready!
Step 5: Connecting the Button to the Arduino Board
To connect the switch to the arduino board simply follow the arduino site tutorial for push button code.
you can find it here: http://www.arduino.cc/en/Tutorial/Pushbutton