You will use elastic thread in the bobbin of your sewing machine, but you cannot wind it on your machine. Handwind the elastic thread around a bobbin. Do not stretch the elastic thread as you wind, and move back and forth across the bobbin as you wind the thread on. Don't worry about making it look perfect, just continue winding elastic thread around the bobbin until it is nearly full.
Place normal thread that matches your fabric in the top of your machine and thread the needle. Place the elastic thread bobbin in your machine.
Prep the top of your fabric by making sure it is cut straight across. Then sew your first line about 3/8 of an inch away from the edge of your fabric. Backstitch at the beginning and end of your line. You should see the fabric begin to gather up right away.
Stitch another row about 3/8 inch away from the first row. The fabric will be gathered up, so stretch it out flat as you sew.
Continue sewing rows of fabric until you have as much smocked area as you would like.
It's easiest to switch to a new bobbin in between rows. However, if you run out of elastic thread mid row that's ok. Just hand wind a new bobbin and then start by backstitching over the last few stitches you sewed. When you are done sewing, tie the two tails of elastic thread together (on the wrong side of the fabric) and trim any extra thread.
When you are finished, use your iron to shoot steam at the smocked area, which will cause it to gather up even more. You'll be able to see matching thread on the front of your smocked piece, and rows of the white elastic thread on the back of your piece.