Click to turn on the Magnetic Lasso Tool, and then move it along the edge of the object you want to select. As you move your mouse, Photoshop will automatically drop anchor points (shaped like squares) along the path you follow. Keep following the path until you get back to where you started tracing the edge
For a much more useful icon, press the Caps Lock key on your keyboard. This switches the icon to a circle with a small crosshair in the center. The circle represents the width of the area that Photoshop looks for edges. Only the area inside the circle is looked at. Everything outside of it is ignored. The closer a potential edge is to the crosshair in the center of the circle, the more importance Photoshop gives it when trying to determine where the edges of your object are:
Using The Magnetic Lasso Tool
Here's a photo I have open in Photoshop of a Chinese sculpture. The edges of the sculpture are well defined, so I could try to select it by tracing around it with the standard Lasso Tool. At least, I could do that if I was looking for an excuse to pull my hair out in frustration. A much better choice here would be the Magnetic Lasso Tool since it will end up doing most of the work for me
To begin a selection with the Magnetic Lasso Tool, simply move the crosshair in the center of the circle directly over an edge of the object and click once, then release your mouse button. This sets a starting point for the selection. Once you have your starting point, move the Magnetic Lasso Tool around the object, always keeping the edge within the boundaries of the circle. You'll see a thin line extending out from the cursor as you drag, and Photoshop will automatically snap the line to the edge of the object, adding anchor points as it goes along to keep the line fastened in place. Unlike the standard Lasso Tool, there's no need to keep your mouse button held down as you drag around the object:
To zoom in on the image as you're dragging around the edges, press Ctrl++ (Win) / Command++ (Mac). Press Ctrl+- (Win) / Command+- (Mac) later to zoom out. To scroll the image around inside the document window when you're zoomed in, hold down your spacebar, which temporarily switches you to the Hand Tool, then click and drag the image around as needed. Release the spacebar when you're done.
Changing The Width Of The Circle
You can adjust the width of the circle, which changes the size of the area that Photoshop looks at for edges, using the Width option in the Options Bar. If the object you're selecting has a well-defined edge, you can use a larger width setting, which will also allow you to move faster and more freely around the object. Use a lower width setting and move more slowly around objects where the edge is not so well defined.
The only problem with the Width option in the Options Bar is that you have to set it before you click to begin your selection, and there's no way to change it once you've started dragging around the object. A more convenient way to adjust the width of the circle is by using the left and right bracket keys on your keyboard. This gives you the ability to adjust the size of the circle on the fly as you're working, which is great since you'll often need to adjust its size as you pass over different parts of the image. Press the left bracket key ( [ ) to make the circle smaller, or the right bracket key ( ] ) to make it larger. You'll see the value for the Width option changing in the Options Bar as you press the keys, and you'll see the circle itself changing size in the document window:
Edge Contrast
While the width of the circle determines the size of the area that Photoshop looks at for edges, a second and equally important option when using the Magnetic Lasso Tool is Edge Contrast, which determines how much of a difference there must be in color or brightness value between the object and its background for Photoshop to consider something an edge.
You'll find the Edge Contrast option in the Options Bar to the right of the Width option. For areas with high contrast between the subject and its background, you can use a higher Edge Contrast value, along with a larger Width value (larger circle). Use lower Edge Contrast and Width values for areas with poor contrast between the object and background:
Like the Width option, the Edge Contrast option in the Options Bar can only be set before you click to begin your selection, which doesn't make it very useful. To change it on the fly as you're working, press the period key ( . ) on your keyboard to increase the contrast value or the comma ( , ) to decrease it. You'll see the value changing in the Options Bar.