Creating a realistic water surface in Photoshop is quite a challenge because it is the distorted reflection of the surroundings that makes the water look liquid. The displace filter is an excellent tool for making this distortion.
The displace filter "shifts pixels" in an image according to the brightness values of a displacement map. You can use any .psd file as a displacement map (if saved with "Maximize compatibility"). Displace uses the first and the second channels of this .psd file for horizontal and vertical displacement respectively. Each channel is a grayscale image. Medium gray (brightness 128) does nothing. Darker values will shift an image in the positive direction (in Adobe coordinates). Brighter values cause a shift in the negative direction. The amount of displacement can be controlled separately. At a scale value of 100, the displacement measured in pixels is equal to 128 minus the brightness of the displacement map. For example, a white pixel will shift an image 128 - 255 = -127 pixels at the corresponding pixel at that setting.
The displace filter "shifts pixels" in an image according to the brightness values of a displacement map. You can use any .psd file as a displacement map (if saved with "Maximize compatibility"). Displace uses the first and the second channels of this .psd file for horizontal and vertical displacement respectively. Each channel is a grayscale image. Medium gray (brightness 128) does nothing. Darker values will shift an image in the positive direction (in Adobe coordinates). Brighter values cause a shift in the negative direction. The amount of displacement can be controlled separately. At a scale value of 100, the displacement measured in pixels is equal to 128 minus the brightness of the displacement map. For example, a white pixel will shift an image 128 - 255 = -127 pixels at the corresponding pixel at that setting.
The following tutorial shows how to create a relatively simple displacement map and how to create a water surface with it. This method does not adjust for wave height and distances, but it produces good results if the water is calm and if the surface is not intersected by other elements.
Part one: creating a displacement map
We start with making an image in which the brightness represents the height of the surface. Bright is high, dark is low. The dimensions of this image control the size and shape of the waves. Start with a larger image to create smaller waves.
Part one: creating a displacement map
We start with making an image in which the brightness represents the height of the surface. Bright is high, dark is low. The dimensions of this image control the size and shape of the waves. Start with a larger image to create smaller waves.
- Create a new file in RGB mode of 1000 pixels wide by 2000 pixels high.
- Go to Filter > Noise > Add Noise... Enter these settings:
Amount: 400%
Distribution: Gaussian
Monochromatic
- Click OK.
- Go to Filter > Blur > Gaussian Blur... Choose a radius of 2,0 pixels and click OK.
We will use the result of the previous steps as a bump map to create a representation of the tilt of the surface. We will do this separately in channel 1 and channel 2. You can ignore channel 3. It does not affect the displace filter.
- Select channel 1 in the channels palette.
- Go to Filter > Stylize > Emboss... Enter these settings:
Angle: 180°
Height: 1 pixels
Amount: 500 %
Click OK - Select channel 2.
- Apply the Emboss Filter again, but this time use an angle of 90° instead of 180°.

- Unlock the background layer.
- Zoom out and go to Edit > Transform > Perspective.
- Drag one of the bottom corners to the side, to a width of 600% and hit Enter.
- Select the canvas with Ctrl+A / Command+A.
- Press Ctrl+Shift+T / Command+Shift+T to transform again.
- Crop away the area outside the canvas with Ctrl+A / Command+A and Image > Crop.
- Reduce the height of the image to make it square. In this case 1000 by 1000 pixels.

First adjust channel-1:
- Select channel 1.
- Press Q to switch to Quick Mask Mode.
- Draw a white to black linear gradient from the top down across the image to create a gradient mask.
- Press Q to go back to Standard Mode. Now we have a gradient selection.
- Fill with medium gray (brightness 128).
- Select channel 2.
- Go to Quick Mask Mode.
- Draw a gradient to select the narrow part near the horizon where the waves are too large.
- Press Q to turn the mask into a selection.
- Fill with medium gray.

- Save as .psd with "Maximize Compatibility".
You may have to change the preference at Edit > Preferences > File Handling > Maximize PSD File Compatibility to be able to save with Maximum Compatibility.

Part two: creating a water surface
We will create a lake in this valley.

Part two: creating a water surface
We will create a lake in this valley.

- Determine where the horizon should be. Select everything above this line and copy it to a new layer. This will be the reflection layer.
- Extend the canvas downwards to make room for the reflection.
- Flip vertical and move the layer down to mirror it with the background.

- Create a new layer below the reflection layer and link it to the reflection layer.
- Fill the area behind the reflection with the desired color. (You can adjust it later with Hue/Saturation.)
- Add a layer mask to the reflection layer. Draw a white to black gradient down from the horizon to show the lower part of the color layer.

- Select the reflection layer and Ctrl+click / Command+click the layer mask to make a gradient selection.
- Lock the transparent pixels by clicking the little checkerboard icon in the layers palette.
- Go to Filter > Blur > Motion Blur... Use an angle of 90°. Set the distance value and click OK.
- Repeat the motion blur with Ctrl+F / Command+F.
- Unlock the transparent pixels and deselect.

The displacement map will stretch or shrink to fit a selection. To get the right perspective, the horizon of the displacement map should approximately coincide with the horizon of the scene. Here, we can just select the content of the reflection layer to get the right alignment.
Only a little displacement is enough to make the water look liquid. The right amount of displacement depends on the size of the image and height of the waves.
- Use Transform to scale the reflection layer to 400% in both directions.
- Ctrl-click / Command-click on the reflection layer thumbnail to make the selection.
- Go to Filter > Distort > Displace... Enter the amount of displacement. The horizontal scale value should be about 50% of the vertical scale. Also select "Stretch To Fit" and "Repeat Edge Pixels". Click OK.
- Find the displacement map on your computer and click "open" to apply it.
- Deselect and use Transform to scale back to 25%.

We will make some final adjustments to complete the image.
- Select the layer mask, go to Levels and change the white output level to about 240 to make the surface slightly transparent near the horizon. If needed, use the other sliders to further adjust the reflectivity.
- Finally, cut away the edges of the image if the repeated edge pixels are noticeable.
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