This site has a whole book on how to make doll hair:
http://www.joyswaldorfdolls.com/dollmaking_supplies/wig_making_instruction_book.htm.
A good friend of mine makes beautiful waldorf-style dolls and she uses this book. Basically, you crochet a hair cap which is hand stitched to the doll's head. Then depending on the style you want, you insert lengths of yarn by tying them to the cap. The best part is that if the hair gets matted or dirty or whatever, you can cut the yarn off and insert new hair!
I'm about to make my little one a doll and have ordered my supplies from Joy. Everything I ordered was great especially her hair yarn! Since my daughter has curly hair, I ordered the bouclez (
http://www.joyswaldorfdolls.com/dollmaking_supplies/yarn_for_doll_hair.htm) and absolutely LOVE it!.
Hope this helps!