Attach a large piece of paper to the wall.
Use colored markers or crayons to draw the basic shape of the waterfall and surrounding trees and rocks on the paper.
Paint the image in as much detail as you want using a photograph of a waterfall as a reference if you want to create a realistic look. Allow the paint to dry completely.
Attach one or several long, blue pieces of lightweight, semi-sheer fabric to the paper with a stapler. Staple along the underside of the top edge of the fabric to hide the staples and to allow the rest of the fabric to flow freely. Add layers of fabric in various shades of blue until you have achieved the look you desire.
Allow the fabrics to "pool" at the base of the image. Spray paint foam "rocks" to surround the pool if desired.