Add another layer above that, this will be the 'Shadow' layer, so name it as such. Make this layer an 'Overlay' layer (although some of the other effects work well too. Multiply, for example, makes the transition between colour and shadows much cleaner.) and pull out a paintbrush or airbrush tool. Keep it at a reasonable size, lower the opacity to 10% to 25% so we can build up our shadows rather than overwhelm the image with it and start applying the brush to areas of where there is most shadow.

I also use the smudge tool to smudge the edges of a brush along a path to fade it out rather than have highlights always end with circles. I also use the selection tools to good advantage to partition off areas that I am working on. By using the Artwork layer and the magic wand tool, select an area and then use Select | Modify | Expand to selct areas as needed. This will keep the areas you shade under the lines (make sure to select your shadows layer though after selecting). For more information on paths and selections, click Here.

Now the thing you need to consider here is light sources. Make sure all your shadows are there for the right reasons and keep them all correct accordingly. There is nothing worse (well there is, but we won't go into that) than an image with ONE light source, and 10 shadow directions. Looks weird and doesn't come across well. So always keep in mind the direction of your light source.

A good understanding of virtual space and lighting comes in handy here too. It allows you to pre-visualise the virtual space and what the light should be doing. Things get really interesting when you start adding multiple light sources, and then those with different coloured light. This is something you do to create mood and effect and can go a long way in creating a pictures atmosphere.

After you get the basics of your shadows down (just keep practicing till you get it right!) then you are ready to add the highlights / lighting. Depending on the end result you are going for you may need more than one layer of lighting, in my case I only have the one, and it's a basic light. So I add another layer above my 'Shadows' layer and call it 'Highlights' and make it a 'Screen' effect layer. This is similar to 'multiply' in that it makes white solid and black see through. Another thing you can do is to set the layer to have a 'Colour Overlay' blending effect (yet still paint with white). What this does is give your highlights a hint of colour, as there is rarely any light that gives off a pure white light. It also improves the work in that it doesn't look so flat. For mine I made the overlay a blue.
Once again this is a case of knowing where light is to fall on your character. Build up where the highlights of your character should be using the paintbrush / airbrush tools. I also use the smudge tool to smudge the edges of a brush here as well. My characters highlights aren't that obvious, this is due to the fact he is a mostly dark character. Looking closely on the coat and metal you will find there is indeed a more lighter area than previously.

After the basics of Shadows and Highlights, I added detail either just by drawing it in or using the many tools of photoshop to create a particular effect. This can be the most time consuming process, depending on how good you want the end result to be. Generally the more detailed the better your result will be, but this is not always the case. In this case I didn't feel like going too far into it ( as yet anyway, as I want to get to the 3D stuff now! ) so I focused on the hair, the ball of flame and other small things to get it to a level of completeness that I am happy with to produce the final result.

The following links include tutorials I have made (or other peoples) that have good detail tutorials on photoshop skills if you really want to get into it.

http://www.phong.com/tutorials/
http://www.shadowness.com/tutorial.php

I do intend on going over the image once more later on after I get further into the 3D. Things to note would be the shadows that the flame would be giving off (a second light source), more detail and generally COOL things. So stay tuned for that.

There's not much more I can tell you in this regard as it's more a visual learning guide than not. So look at the steps involved and the works relating to them and see if you can develop your own methods of creating the work of art you want. Oh, and have I said practice?! :)

Every journey starts with the first step, as they say. So make sure you have a good set of shoes and a walkman.