I did this a short while ago I started with a rough and very light pencil sketch, took a white colored pencil to the areas in the tail I didn't want the color. (to get the texture of the scales)
then took my water color pencils to all the areas I wanted color, then wet the areas to make the colors bleed.
then I took the whole picture into photoshop, pulled out my character (and fiddled with the colors here and there... 'cause the color didn't come out as strong as I wanted) then did the background also in photoshop.