The following include some things I've learned from my own experiences using Derwent watercolor pencils since Fall 1999.  I think you will be PLEASANTLY surprised with the range of effects you can get with these kinds of pencils.  First I will begin by defining this medium and continue with my own tips and tricks.  Check back as I continue to add to this page - enjoy....

With water-soluble colored pencils, how can you......

Achieve rich areas of color?

Lay down a thin layer of clear water on the paper in the area you want to apply the color, then directly apply color with the pencil.  Repeat as needed.

 

Achieve smooth gradations (i.e., sky, water)?

Dip brush in water - dab brush on tip of pencil and brush paper (with varying levels of pressure depending upon amount of color you want). Brush onto paper with horizontal or vertical strokes.  While paper is still wet, continue to brush and blend colors to achieve a smooth gradation. 

Combine the look of colored pencil strokes with a touch of watercolor wash blending?

Draw with dry pencil in a normal colored pencil fashion applying varying levels of pressure to achieve different values. Dip brush lightly in water and brush over dry pencil to give it a subtle blended/washed effect and yet still retaining some of the pencil strokes.

Achieve the look of a detailed 'watercolor' painting?

Dip fine-tip brush in clear water and then dab brush on pencil with varying levels of  pressure depending upon amount of color you want. Brush onto paper according to contours of the subject area you want to work in.  To achieve darkness/richness in certain areas, let painting dry (usually just a few minutes) and continue above steps, layering and blending colors together.  On dried areas, use the tip of brush to paint in fine lines of detail .

Add touches of detail?

Towards the completion of your painting when it is dry, sharpen pencil and draw in fine lines with a dry pencil.

What do you do when you......

Have areas of your painting that have an unintended 'hazy' cast to it?

The "milky haze" is wax bloom. Even though colored pencils are water-soluble, their pigment is still held together with wax. The only difference between water-soluble and dry colored pencils is an emulsifier added to the ingredients of the water-soluble pencils.  The wax bloom is caused by a heavy layering of colors.
To get rid of the haze, give your painting 5-6 LIGHT coats of Krylon workable fixative when you're completely done (workable fix is NOT workable with colored pencil) and that should permanently remove the wax bloom.

(Answer from Gary Greene, author of "Painting with Water-Soluble Colored Pencils.")

Now that I've given you a taste of my personal experiences with this great medium, this is just the 'tip of the iceberg'.  I would DEFINITELY suggest buying the following comprehensive resource on water-soluble pencils by Gary Greene