Spatial Reasoning
The first kind of knowledge you have to have to dress well is spatial reasoning. You have to know what fits where, and to know this you have to know the nature of the thing you're dealing with: the female body. The shape of a woman's body is a unique one; thus, the dress used to ornament such a shape must harmonize with its underlying structure. That is, a woman is not a rectangle:

She is not an oval or blob shape either:

Finally, though having natural curves, a woman's body does not have bulbous growths:

Sorry for the immodesty of that last picture, but that brings up the point that, once we recognize the basics of our body shape, we also have to recognize that dress serves to camouflage a bit as well as to reflect reality. It basically covers up but this cover has to be in keeping with the thing. Luckily we don't have to start from ground zero, because the earliest forms of dress necessarily had more to do with function than anything. We can use traditions of dress to find out what shapes really work to highlight natural beauty.
By now, you are probably asking, what are the concrete rules of this spatial reasoning game? Well, rule number one has got to be that the shape should draw the eye to the face. This is because the face, especially with the eyes, is the window to the soul. There are various ways to do this, and you can experiment for yourself what works. It can be anything from this

to this

Rule two is that your waist should look smaller than your hips, because that's how it really is. The two above dresses are also good examples of that. Why, one might ask, are we trying to end up looking like a triangle from waist to ground, when we are not really shaped like triangles? Well, the triangle shape is one expression of dress that goes in at the waist, but you can also use tailored, straight skirts to achieve the same effect. It's also important to remember that the rule does not work in the same way for everyone--one person might emphasize the waist by wearing full skirts that come in at the waist, while for another it might be more effective to wear a straight skirt with a tailored blouse. Again, this is where experimentation comes in.
Finally, as a third rule, dresses should not be too short--and not only for reasons of modesty. Too-short clothes result in the strange shapes seen on the models above. It's hard to create smooth, clean lines without a space to work with. Some dresses I look at in stores just seem abridged: I wish there were more to them. For thin people, they also emphasize the legs in a way that can make them seem boyish. For not so thin people, it's just a bad idea all around. Here's a reasonable, mid-length dress that bridges the gap:

There's a lot more that could be said, and the discussion can definitely become a lot more particular, but I hope these are some good starting points to muse upon. Basically, I think a lot of fashion designers out there don't exercise responsible spatial reasoning when it comes to the female form, and I think it's something we should be cognizant of in our attempts to look beautiful.