The first step is to pick and image with relatively simple shapes that will look good as a stencil.
Using photoshop, or a similar image editing program, adjust the levels until there is a strong of a contrast between the light and dark areas of the image.
Remove the background and any complex areas of the image that you don't want.
De-saturate the image so that it is black and white and then play with the levels until the image is mostly pure black and pure white.
Print out the image on to a thick card.
Cut out the black areas using a stanley knife. Use discretion if the black area will cut out a white area.
Use acrylic, or fabric paint, to paint the stencil on to a flat piece of fabric.