you know, after plucking for awhile, it is 'almost' automatic to start playing tunes....when you play the right chords, you brain begins to hear the melody notes hidden in the strummed chords. Then, when you miss a melody note, you do it again, realizing that you need to reach 'higher' or 'lower' to find it...and sometimes you discover that the melody note isn't in that chord, so you try the 7th, or the minor...etc. And yes, you really only have to be close, but when a tune gets faster, it gets more important to be 'closer' so you save time.

If you know music theory, it is easier, if you just mess with it like I do, you experiment and memorize the result until a pattern emergizes.

What this guy is doing seems very like the fancy picking of Bryan Bowers, and while neat, is not the only way to approach it. I simply let my middle finger do 90% of the melody strumming/picking, hitting notes on either an up stroke or down stroke, depending on the rhythm and speed...I sometimes combine that 'pinching' technique with alternating back & forth strums, and my thumb is adding bass and occasional melody.