Step 1: Plan It Out.
When choosing a source image, you want to make sure it will work as a stencil. For example, a very overexposed or washed out image won't work very well, because you're missing the details that make it recognizable. With certain subject matter there are certain details that make of break the piece (for example, with people, the eyes are what gives life to the image, with buildings it's the rooflines that define the form, and so forth). Think it out in advance as much as you can, and don't be scared to work with bits and pieces of multiple images to get exactly what you want. For example, let's say you want a stencil of George Bush bending over, and you don't want to draw it freehand. Well, you're never going to find a picture of that to work from, but you sure can take a picture of a friend in a suit and stick George's head onto it in Photoshop. Or see what you can do freehand. Remember, stencils are a form of illustration. Don't marry yourself to the photo.
Step 2: Digital Tweaks
How do you know that you have the right exposure? Well, if the image is coming through, and it looks like it is physically possible to cut, you're there. Like I suggested before, focus on the key details that make the image "read".
If you're an ace illustrator or a longtime stencil fiend, you might find that you can skip this step entirely. After enough stencils you develop an eye for this and can do it with a pen if you need to. This is a very cool thing. Drawing stencil plates by hand from a photo source will impress your friends, but more importantly it's good for you as an artist, because the less married to the digital process you are, the more freedom you have with composition.
Step 3: Draw It Out
1) There's only so much detail you can cut. Even if you're handy with the steel you can't knock out 0.5 mm thick lines, and if you could the paint wouldn't go through them anyhow.
2) Unless you're willing to cut multiple plates of the same color, you can't have islands in your stencil, or areas of "blocking" material that are not connected to the "frame" or border of the stencil. For example, you can't stencil an "O", the best you can do is something like "( )," or a "C" on one plate and an ")" on another, lined up to form a perfect "O".
3) The jaggedness or smoothness of the lines is what will give your stencil image texture, so think about it as you plan your cuts. For example, if you are cutting a stencil of a face, smooth curves will suggest even, smooth skin. Jagged lines will suggest a rough, uneven surface. You can really breathe life into your stencils this way.
4) if you remove too much material when you cut, your stencil will be brittle and flimsy, and more prone to lifting at the edges in the breeze of the spraypaint. This isn't necessarily bad, but be aware of it. If need be you can re-enfroce it with wire (see the Step 5).
Once you're done, print it out. This will be your cutting guide. If you're creating a multi-color stencil, you may want to include some sort of alignment guide so you can line up the plates. Really smart artists will sometimes hide an alignment guide in the piece for themselves. For example, maybe one strand of hair is exactly the same in each color plate, allowing you to line it up.
Step 4: Choose Your Weapon
One thing to consider is that thinner materials make for easier stencils to spray. This is because you don't have to spray from a perfect 90-degree angle to the work, which you have to do with thicker materials, otherwise the surface of the material will block the paint at the edges. This results in "fuzzy" edges.
Another option is a material called frisket film. Frisket film is a material widely used for stenciling by airbrush artists, especially in the automotive industry. It is a plastic film that is a bit stretchy and is adhesive on one side. It cuts very easily with an X-Acto and can be bent around curves. If you're working on a very smooth surface (i.e. finished metal, fiberglass or plastic) frisket film is second to none. It can work well on wood and painted walls, too. It won't really stick to anything rough, like brick or stone. The major problem with frisket film is that it is very flexible and tends to stick to itself (imagine a stencil made from scotch tape). This makes is virtually worthless for more intricate stencils. It's also very, very difficult to get multiple uses out of it. The adhesive will work more then once, but peeling anything but the simplest design off without stretching it or sticking it to itself is quite a challenge. Frisket film can be purchased at art supply stores and some automotive places.
If you're using cardboard, foamcore, etc you'll need to glue your paper guide down so it doesn't move while you cut. I suggest Spraymount for this, which is a spray-on adhesive that you can buy in art supply stores. Any spray glue will work, though. Just make sure you don't use anything that will harden beneath the paper and make it hard to cut, or will remain gooey and stick to the blade, like rubber cement.
Step 5: Cut It Out
If you mess up, you can lay electrical tape over the cut and trim away the excess with your knife. If you wind up with a part of the stencil that feels too delicate or flimsy, you can reinforce it with wire. I like the kind that florists use to tie plants to those little poles. Just lay the wire across and secure each end with a bit of electrical tape. You can also use wire to reinforce "peninsulas" by creating an little arc, like a bridge, from the protruding piece of material to somewhere more stable. If the wire is a centimeter or so off the surface plane of the stencil it won't show up when you paint it.
When cutting I always try to cut the most detailed areas first, for two reasons. With laminated sheets, the more material you remove, the flimsier they get. So this means that the first cuts you make will be the easiest, as the material is the stiffest. Secondly it's best to handle the hardest parts when your blade is sharpest. When cutting curves, you may find it easier to move the whole stencil plate as you move the knife. This can reduce the tendency to bend the blade tip, which will break the delicate bit of metal that forms the point. Don't even try to cut curves with an X-Acto missing it's tip, it makes it far harder to control. Be prissy about your blades-- they're cheap to replace and make all the difference in terms of the precision of your cuts, and in turn the level of detail you can render in your stencils.
As an alternative to this whole process you could go use a laser cutter. Laser cutters will let you create patterns with unbelievable accuracy and detail. But they're definitely not punk rock.
Step 6: Paint It
If you are stenciling inside you have a completely different option for paint: an airbrush. While you might not think to use an airbrush for stenciling, the control is superb, allowing for extremely detailed work. The other important advantage to an airbrush is that you can use any manner of paint you want (as long as it can be thinned to the consistency of milk), allowing you to mix your own colors to get exactly the hue you want. Finally, airbrushes use air as a propellant in lieu of chemicals, which makes the paint far, far safer and less noxious to work with. If you use a non-toxic paint you have a completely environmentally sound and healthy way to stencil. This can be important if you're working in an inclosed space. Airbrushes will also allow you to aerosolize a fabric dye, so you can make nice t-shirts of your stencil designs.
When painting a stencil, you apply the paint as you would with anything else. The goal is to get even paint coverage, so you're applying the same amount of paint to every bit of the piece. This helps avoid drips. You want to paint with short, even strokes, about 18" from the piece. Don't follow a zip-zag path or try to "trace" the pattern of the stencil, instead apply short strokes in one direction. This is so you never turn back on yourself and hit the same spot twice, because when you turn back on your path with the can or airbrush, you apply twice the paint in that one spot whrre you doubled-back. Be sure to keep the spray at as close to a 90-degree angle to the work as possible. This helps hold then stencil down (preventing overspray). You also want to keep the can as upright as possible, which keeps a nice, consistent flow of paint. About 45 degrees is good enough. You may want to incline your work surface if you're working inside so that you're not forced to hold the can horizontally.
When painting, you want to keep the stencils in contact with the surface, or as close as possible, and anchored firmly in place. Some people like using a removable spray adhesive for this, such as 3M Photomount, but I find masking tape along the outer edge to be equally effective and much less messy. When working inside, I keep a jar of pennies around. By placing little stacks of pennies on the stencils sheet I can anchor it down very effectively. Working outside little loops of masking tape can be a big help if the stencil is too big to secure with one hand. If you're inside and have the luxury of doing so, be sure to let your stencil dry fully before lifting the stencil, otherwise you risk smearing paint at the edge. Try your best to pull the plate straight up instead of dragging it across the surface to avoid this. You should give your piece at least 90 seconds of drying time before applying the next color. If you're inside and have the luxury of time, give it a full 10 minutes.
Step 7: Stay Safe
I hope you found this tutorial helpful. Have fun and keep pushing the stencil medium forward.