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The blending mode defines how a layer interacts with layers behind it.
To choose a blending mode, use the Layers panel (Cmd-L).
Some blending modes are described below with examples. Information about others, that use Core Image filters, can be found on the Apple's web page:
http://developer.apple.com/documentation/graphicsimaging/Reference/CoreImageFilterReference/Reference/reference.html#//apple_ref/doc/uid/TP30000136-SW71
The used filters belong to the "CICategoryCompositeOperation" group.
Examples here show how the blending mode of the top layer (active) affects the final image compared with the default settings. Two other layers are set to the Normal mode. Changing blending mode of several layers, you may get different results.
The Opacity parameter was set to 100% by all the layers. The active layer will be shown at 100% and 50% opacity. Changing the opacity of the top layer significantly changes the final image.
By default, a new layer has the Normal blending mode and 100% opacity.
Layers appear in the original layering order.

Parts of lower layers, that are overlaid by the top layer, are excluded. Parts of the top layer, that overlay other layers, are excluded too.
XOR mode, 100% opacity |
XOR mode, 50% opacity |
Default mode |
Parts of lower layers, that are overlaid by the top layer, became darker.
Plus Darker mode, |
Plus Darker mode, |
Default mode |
Parts of lower layers, that are overlaid by the top layer, become lighter.
Plus Lighter mode, |
Plus Lighter mode, |
Default mode |
Only those parts of the top layer remain visible, that overlay any lower layer. The rest is excluded.
Source In mode, |
Source In mode, |
Default mode |
Only those parts of the top layer remain visible that don't overlay any lower layer. The rest is excluded.
Source Out mode, |
Source Out mode, |
Default mode |
Parts of the top layer, that don't overlay any lower layer, are excluded.
Source Atop mode, |
Source Atop mode, |
Default mode |
Parts of the top layer, that overlay any lower layer, are excluded. Looks like the top layer is behind all others.
Destination Over mode, |
Destination Over mode, |
Default mode |
Only those parts of lower layers remain visible that lay behind the top layer.
Destination In mode, |
Destination In mode, |
Default mode |
Only those parts of lower layers remain visible that are not overlaid by the top layer.
Destination Out mode, |
Destination Out mode, |
Default mode |
Only those parts of lower layers remain visible that are overlaid by the top layer. And parts of the top layer that don't overlay any lower layer stay visible. The rest is excluded.
Destination Atop mode, |
Destination Atop mode, |
Default mode |