What AncientWolf describes is my preferred method as well. Take an existing image that works (like something out of the default skin package) and examine how it works with alpha layers. The basics is that whatever is black on the alpha layer will be transparent on the art layer, while whatever is white will be viewable. Some authors, like Trottimus, uses shades of gray around the edges of white on the alpha layer to create a "fade-out" sort of look on the art layer. But that's more advanced.
The basics (as it applies to the alpha layer): black = transparent ...... white = viewable art.
Guildmaster, Scarlet Underground, Silverlode