Click on the parts of the little diagram to tell Photoshop where you want your current image to be anchored. Ignore the arrows until after you have clicked on part of the diagram.
So, for example, if you click on the top-center box, you'll see the diagram will change to show you that the canvas is going to expand downward and out to the sides. If you click on one of the corners you'll see that the canvas is going to expand away from that corner.
Hope this helps!
Another tip with Canvas size is to use the Crop tool instead. Dragging the Crop tool outside the image increases the canvas size and fills with the background colour. This is a useful way to go about it because you can drag exactly where you want the additional canvas. You can also hold down Shift to keep the same Aspect ratio, or Alt/Opt to increase equally on all sides.
This works even better with CS6 because you can drag the image inside the new canvas boundries, and even rotate the Canvas before committing to the new increased size. It's an all round win win IMO and unless you need specific, and exact, units, probably better than using the Canvas size tool.
The diagram is divided into 9 little boxes, 8 of which initially have arrows in them.
Ignore the arrows at first and only think about the 9 little boxes.
If you want your canvas to be changed only on the right and bottom, as an example, click on the upper-left little box within the diagram (ignoring the arrow), because the upper-left is where you want your existing canvas to be anchored.
The arrows will change accordingly after you make your selection, and they just show you what box you have selected (the blank one) and what direction(s) your canvas is going to expand or contract in.
Fool with it for a while longer. You'll get it.
media kat wrote:
... why is it that when I press the down arrow it adds to the canvas on top, and when I press the up arrow it adds to the canvas on the bottom?...
I understand what's confusing you. The arrows do not show what will happen when you click on any of them but what is currently happening with the middle anchor point selected. And to be more informative for new users these arrows should be shown two way like this <-----> and to avoid such confusion they should be outside the 9 boxes representing anchor points. I guess they wanted to save UI space.