The displacement plug-in is a great add-on to Rhino 4 but is also pretty buggy. The integration into Rhino 5 is much smoother and has a much better interface and option set.
Displacement maps are typically, but not always, black and white with grey tones defining levels of transitions. You can make your own quite quickly or just use Photoshop’s desaturate option (PC=ctrl+u, Mac=Command+U) to an image with good levels of gray. A good image will have lots of variance such as:
Notice the smooth levels of gray in between the black and white? That will give you a smoother transition between your high points (white) and low points (black). You can use colored images as well, but you are leaving the levels up to the computer to distinguish and will be less accurate in most cases.
The plug-in can be found here.
If you’ve never installed a plug-in before, you can find my handy little guide here.