Relevancy isn't just about the tags that you're using. It's a combination of four elements; Title, Image, Description, and Keywords/Tags.
Let's grab this item from your shop for reference:
http://www.etsy.com/listing/107181213/chunky-infinity-scarf-infinity-cowl-seedWhen you're deciding what title to use, you definitely want to choose one of your keyword phrases to use as your title tag. Titles should be less than 70 characters, spaces included. It doesn't matter how many words those are, as long as they're not more than 70 characters because Google will only show the first 70 characters of a title. (This is probably why most Etsians say the first three words are most important.)
You also want to steer clear of keyword stuffing, which is defined as using as many keywords in your titles as you possibly can. The idea that you will return more searches because of this is a myth and a very harmful one, at that. Google actually penalizes web pages that do this and while a page may show up in the search results the first few times, it won't take Google long to start reading it and indexing it as spam, thereby removing it from its SERPs.
Avoid using punctuation marks in your titles if you can. If you can't, use a hyphen ( - ) to separate your words rather than a comma. The hyphen is the second most search engine friendly punctuation mark. (The friendliest is the bar ( | ), but for some reason, Etsy doesn't allow its use in titles.)
In my opinion, a good title for this scarf would simply be Infinity Scarf - Olive Wool. It uses 28 characters, has a commonly used search term (keyword phrase) and accurately describes your item.
Images are also important for search relevancy. The most important factor, the alt ref tags, have already been taken care of by Etsy. If you right click on your picture and select 'Inspect Element', you can see the alt ref tags that are being used...it's the same as your title. Alt ref tags are relevant to search engines because crawlers cannot see the image and must rely on the alt ref tags to tell them about the picture. So, if your title is relevant, your pictures are relevant, as well. This is another reason why your title is the most important factor in the relevancy equation.
In your description, you want to use your keyword phrase again, as well as some other search terms (keywords/phrases) that are relevant to your item/page. But, don't bog the description down with more keyword stuffing. The first 150 - 160 characters (including spaces) are important for search engines since that is what shows up in SERPs.
Descriptions can be tricky because you want to keep a conversational tone, provide an accurate description, -and- optimize it for search engines without it looking as though you're optimizing it for search engines. Choose two to three keyword phrases (including your title keywords) and use them in your description. You can think of keywords/phrases as salt. You just want to sprinkle some to add flavor, but don't overuse it because then it's just too salty and inedible.
For this item, I would use Infinity Scarf, Peruvian Highland wool, and olive green scarf as my keyword phrases in my description.
Your keywords/tags. Google doesn't use tags anymore (which I think is a good thing). But, Etsy's search engine does and I believe that Bing still uses them, as well. So, here, you want to reiterate the keywords/phrases that you've already been using, as well as use a few additional keywords/tags that you may have mentioned in your description, but weren't focused on. Some sample keywords/phrases that I would use for the scarf listing would be infinity scarf, wool scarf, olive infinity scarf, chunky wool scarf, and green scarf. If you need help brainstorming other relevant search terms, you can use Google's Keyword Tool. It's an excellent source for keyword research.
I use these techniques in my own shop. I sell mostly jewelry items, which is a highly saturated niche. I use Google's Keyword Tool to help me decide on which keyword phrase I want to focus on before I list. Some of my items are similar (IE mens bracelets) so I try to use different search terms for each bracelet that I offer (mens beaded bracelet, mens magnetic bracelet, mens bone bracelet) because this allows different pages of my shop to show up on SERPs and that draws more traffic.
For each of these search terms (mens beaded bracelet, mens magnetic bracelet, mens bone bracelet), at least one of my items shows up on the first page, sometimes within the first three or four items, and has done so since the day that I listed the item. (Every now and then, my item will appear on the second page, but that's when I go in and tweak the description and keywords.)
Sorry for the extremely long-winded response. >__<