I want to play more natural guitar... how?

I've been playing guitar for about a year now, and I've gotten pretty good at chord progression (of the ones I know which is about 20) And recognizing/executing notes. But I would really like to be able to play more by ear. My cousin just taught himself how to play, and he's awesome, but he can't read notes for his life. So I kindof want to move into a place where I can just pick up the guitar and groove out, without needing like a song book... What do I need to do to get to this point?