Creating textured paint using a piece of cloth is known as rag-rolling. Rag-rolling creates a smooth, soft, cloth-like texture. There are two methods, rag-rolling on and rag-rolling off.
For rag-rolling on, apply the base coat with a brush, then apply the topcoat with the cloth. Cut your cloth with scissors into large squares. Don't tear the cloth, as this will lead to frayed ends that might get stuck on the wall. Bunch the cloth in your hands, with the edges tucked in, not extending away from your hand where they create unruly patterns. Dip the cloth in your topcoat paint and apply to the base coat with a rolling motion.
For rag-rolling off, more cloth is needed because the cloths are used to remove paint, instead of applying it. Paint over the base coat with your second coat. Roll cloth into a cylindrical shape, then roll cylinder down the wall, lifting off the wet paint. You'll need to replace the cloth cylinder when it gets too wet and stops removing paint.