How I watch it kind of depends on the moment and the mood I'm in. Like after a long tiring day at school, I don't care where or how: just give me an AMV!
Still, I prefer watching them:
1) No headphone. They are annoying and make my ears itch.
2) Medium screen. Small takes too much stress from the eyes and large... Well... Somehow the AMV's don't look so good in that format.
3) Alone, although when an AMV is really good, I'll grab my sister and show it to her. She does it the same way, so we both get to see the best the other has downloaded. We have totally different taste, so I guess this works best ^_^
4) Music hard. Soft is for softies... I like my music just hard enough I don't hear anything else anymore. Still, no so hard that it's blasting around...
5) Dusk or dimmed light. Bit of sunlight is never wrong, but I like watching them in the shadow. Still, totally black is not that nice. Makes that it hurts my eyes (and I can't see that well when it's dark

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6) A couple in a row. When I have a new one, I watch it straight away, but if I sit down to watch AMV's, I put about 10 on, the ones most fitting my mood. I like it when the music is nice, closing my eyes and listen (and still see the AMV in my mind

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Still, in the end it doesn't matter all that much, as long as I get to see an AMV once a day ^_^