The Knockout effect is found in the Layer Style menu. It’s used to turn one layer into a window on your canvas to reveal the bottom-most layer. This works particularly well in designs for scrapbooks.
Open up a background and a separate image to sit on top. This could be a photo on top of a texture, for example. We’ve gone for a picture frame in front of a brick wall.
Apply a shape to use as the outline for the Knockout effect using one of the Shape tools (U). These are entered onto a new layer at the top of the stack and determine the shape of the effect. Type can also be used for the Knockout.
Use the Move tool (V) to position the shape to the desired place. Double-click on the Shape layer to open the Layer Style dialog. Under Blending Options>Advanced Blending reduce the Fill Opacity slider to 0%. Your shape should disappear.
In the Knockout drop-down options change it to Shallow. The shapes will now reveal the background through the photo. Other styles can be added, such as an Inner Shadow, to bring depth and realism to the effect.