USB to Serial communication ATMEGA 328 standalone.

HI Friends,

I have prepared a board to work stand alone. I am trying to achieve communication between computer and my standalone Arduino. I have attached pics of the USB RS232 converter that I have. My question is how to connect the USB serial to Arduino stanalone. I assumed that TX from USB to RX of ATMEGA and RX from USB to ATMEGA TX would work. I am trying to control 3 LED's from my computer. With the connections above All the LEDs start blinking randomly. Not sure whats wrong. Below is my code.

/*
Author: Suresh Mali
Date: 17 March 2014
Version: 1.0.0

Description: Swicthing lights based on computer input
 */

void setup() {
  // initialize serial communication:
  Serial.begin(9600); 
   // initialize the LED pins:
      for (int thisPin = 5; thisPin < 8; thisPin++) {
        pinMode(thisPin, OUTPUT);
      } 
}

void loop() {
  // read the sensor:
  if (Serial.available() > 0) {
    int inByte = Serial.read();

    switch (inByte) {
    case 'r':    
      digitalWrite(5, HIGH);
      digitalWrite(6, LOW);
      digitalWrite(7, LOW);
      break;
    case 'y':    
      digitalWrite(5, LOW);
      digitalWrite(6, HIGH);
      digitalWrite(7, LOW);
      break;
    case 'g':    
      digitalWrite(5, LOW);
      digitalWrite(6, LOW);
      digitalWrite(7, HIGH);      
      break;
    case 'o':  
      digitalWrite(5, LOW);
      digitalWrite(6, LOW);
      digitalWrite(7, LOW);      
      break;    
    } 
  }
}

Please help. Thanks!

[RESOLVED]
Found the solve. Just had to ground from USB to serial converter.

Good catch! Yes, All signals require a common GND return. I hit the same, when I tried making a expanded "Buttons" over Network, and suddenly realized, even after trying all the suggestions I got from here, and still not having it work, that... the common power rails on a long breadboard section, were not 2 solid, but... 4...( :fearful: D'OH! )
An alternative, to the FTDI dongle, you could pull the ATMEGA328 from a socketed Arduino, and use the digital 0 & 1 pins (TX & RX going TX to TX, RX to RX I believe, Don't quote me on that.) to a stand-alone 328. (as long as the stand-alone has the bootloader.)