| This type of thing is best done with distortion filters. The ripple filter, for example, will work here, but it's too predictable. Instead, learn how to use the displace filter with displacement maps. You can basically make a selection with the rectangular selection "thing" of most of the pic, invert the selection, put a new layer above and fill it with a soft colour. Then, with the selection still active, click on the background layer (your base picture) and copy paste this section. Drag this layer to the top of the stack, free transform this new layer if you want. Then mess with it with distortion-type filters.
The sample you gave used a combination of things, including displace filters, smudge tools and painting on layer masks.
You'll come up with some interesting borders this way.
Mig |