Shades of Gray
Try this out. Turn on Quick Mask mode—you don't need a selection to begin with. Type D to reset the foreground color to black, and then Option-Delete (Mac) or Alt-Backspace (Windows) to fill the Quick Mask. Now paint within the Quick Mask with 20% gray (you can use the Color Picker palette to choose grays). Then turn off Quick Mask mode and paint in the selected area with bright red. Now choose Select > Deselect, lower the opacity of the painting tool to 80%, and paint with bright red. Your reds should look exactly the same. That's how Photoshop makes a selection fade out—by simply lowering the opacity of the tool you are using. This can sometimes be confusing, though, because the marching ants show up only where an image is at ...
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