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Create a Dreamy Photo Effect with Photoshop Elements

By Sue Chastain, About.com

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Blur the Clipping Mask for a Soft Edge Effect

Blur the Clipping Mask for a Soft Edge Effect
The Shape 1 layer should still be selected in your layers palette. Go to Filter > Blur > Gaussian Blur. Adjust the radius however you like it; the higher the number, the softer the edge effect will be. I went with 25.

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