Open your flag. If you want to use the one im using, click here to download it.

Make sure your flag is on its own layer and you have some room around the flag to work with.

Make a selection of about 95% of the flag to the RIGHT, leaving only about 5% of the flag on the left unselected (see picture below).

Now go to Select->Feather and enter 50px.

Choose the flag as the working layer and go to Filter->Distort->Wave (CLICK HERE TO VIEW).

Note:The reason we use the feather and selection in the above step is so we apply the wave to the flag, while leaving the left edge of the flag slightly straight, in case we want to hang it on a pole. Without the selection step above, the left end of the flag would look something like the right end of the flag, which is not very realistic.

- Create a new layer. Set your foreground color to dark grey (#575757)

- Next we want to apply some shadows to the flag. Use the brush tool and select brush size to 13 HARD EDGE. Then make 4 vertical strokes around the waves. Do all 4 of these strokes on the new layer you just created

Now apply the wave filter to it. Filter->Distort->Wave (CLICK TO VIEW)

Now go to Filter->Blur->Guassian Blur. Set radius=9

Now set the blending mode of the shadow layer to "Soft Light"

Here is mine with a pole attached. (DOWNLOAD PSD FILE)