I am at the step of weathering my Panzer IV and I would like to know how does one obtain the "Paint Chipping" effect that I always hear about, on 1/72nd scale armor?
Can someone please tell me how to do this technic in a step by step form? What colors do I use to obtain this effect in this scale?

With a very tiny brush and a sharp lead pencil. Possibly very sharp colored pencils too.

Think of those areas that would get the most wear and abrasion - crew scuffings, eqpt scuffings and scratches, etc.

If it were me; knowing the Panzers were primered in red oxide, I'd carefully apply tiny "chips" with red oxide paint.

Some of these would have medium-gray "over paints" to represent bare metal that has been weathered within a perimeter of red oxide, while some with "lead pencil over-paints" to represent bare metal before it weathers to a gray, then eventually to a rust. Or a combo there of.

But always very sparingly, better is the enemy of good and you don't want to over due it at such a small scale.

JMHO.

Steve saidit well. It is hard to see on this 1/72 Tiger, but I used a sharp No. 2 pencil and a very light drybrush in rust to hit some high points to simulate both fresh bare metal and rusted. You have to be very subtle with this scale and chip obvious areas such as hatch cover openings, hinges, edges, anywhere foot traffic would wear paint. Remember, less is best.

I use sharp colour pencils (reddish brown and grey, and that always worked for me, although it is really hard to see on the model in real life.
I agree with bowjunkie. Due to the fact that most chipping is hard to see in 1/72, you're quickly willing to overdo this so that all the work you put in would become more visible.
Don"t get too enthousiastic.

I'm not a big fan of the chipping fad in 1/35, IMHO, it is often way overdone with no though to how the paint was chipped, but I digress. Like the other guys said, be very subtle in this. Unless the exposed metal is being constantly polished by being rubbed, it will oxidize almost immediately. To see what I mean, nexrt time your car sits in the rain for a couple days, look at the rotors on your disk brakes.