I use both wet and dry application of luster dust, depending on the effect and shine I want. If dry, I steam after dusting so it won't come off when I touch it. If wet, use extract or vodka to apply the dust. I always do this (both wet and dry) on fondant that has been air dried.
You can do a test dusting on a small piece of white and colored fondant and see which one you prefer more. There are cases where it's best to do it on white, and sometimes on colored. If you want deeper color, do it on colored fondant.
Miriel has given you awesome advice! One thing on dry dusting, I use a large blush brush(a new one just for it) to dry dust the luster dust on. I do that for larger things that need to be dusted, like the whole cake, or even clouds on a cake. For small dry dusting, you could keep to the paint brush for more accuracy(sp?). For painting I use the paint brush, and it is good to have a real good quality paint brush that can be found at craft stores=) Just my little 1 cent with Miriel's 99cents=)
Edited for spelling, I am up too late 
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