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So that you can see what I'm working from, here's the original image. This is a Poser render, but you can try this technique with photographs and other images, as well.
The way to make a selection based on luminance in Photoshop is by simultaneously holding down Ctrl-ALT-~ (on a Mac, use the COMMAND key rather than Ctrl). The ~ (tilda), if you're unfamiliar with it, is in the far upper left hand corner of most keyboards, on the number row.
If you've pressed the keys correctly, Photoshop should now be showing a selected area in the image. Put this selection on a new layer with Ctrl-J (or, if you prefer the menus, Layer: New: Layer via Copy).
You now have a layer based on the image's luminosity. Yay! But what can you do with it?
Select the new layer you've created and from the menu choose Filter: Blur: Gaussian Blur. For this image, I chose a blur of 2.5. Obviously a bigger image will need a higher blur, and a smaller one a lower blur.
Set the blurred layer to Soft Light. Voila, softly enhanced image.
To try this one, make the previous layer you created and blurred invisible, and select the original image layer. Go through the selection process again (Ctrl-ALT-~ and Ctrl-J). Select the new layer. Blur the new layer as in the previous step, only this time, leave the layer on “Normal” blend mode.
This may look okay as is, depending on how much blur you used and the nature of the image, but in this case, her face is much too blurry, so I'm going to take my eraser tool and erase some of the blur layer around her face.
Note that you can always erase any part of the blurred layer that you want, and you can get some interesting effects that way.
To try this one, make the previous layer you created and blurred invisible, and select the original image layer. Go through the selection process again (Ctrl-ALT-~ and Ctrl-J). Select the new layer. Blur the new layer as in the previous step, only this time, leave the layer on “Normal” blend mode. (Sounding familiar by now?)
Don't blur this time, but instead, take advantage of Photoshop's layer styles (this will require Photoshop 5.5 or higher). Double click the new layer and add an Inner Glow effect. To get this golden wash, I chose a strong golden yellow color with a Screen blend mode (see settings image).
The result is to give the image an overall color “wash”, as you can see.
A luminance selection layer can be very versatile. Try experimenting with blurring, tweaking the color (for example, turning the saturation up or down), and blend modes, and don't forget you can always erase bits that are too blurry or too saturated. It's a highly useful technique that you may find you use for all kinds of effects.