The alpha channel is in your regular image file. Sometimes it is not in the image and it needs to be created within photoshop.
You know the window that has the layers on it? There is another tab called "channels." That is where your alpha channel is either located or needs to be created. It is usually called "Alpha 1." If you create an alpha channel and try to save it as a DDS file it will say too many channels, so it's best to have a DDS file that already has an alpha channel.
You can also use a "layer mask" on a layer-flattened image and save it a PNG file. FSHLINE and FSHx will read the transparency information as an alpha file when importing it into a fsh. Select the layer, "add layer mask", and go to the "channels" tab to edit/paste onto the layer mask channel. Your image will look transparent, but if you save it as a PNG, it will still work correctly in the game after being imported.
This question gets asked too much.
