There are two factors that you want to keep in mind when you are trying to create a naturalistic blending of two or more colors.
In the example above the main color was digitized using a .40 mm or 4 embroidery points space between stitches, on the overlapping colors we increased the space to
.90 mm which decreased the density by more than half. This creates a smoother transition and keeps the combination of densities from getting too dense.
You also want to make sure that you keep all of your stitches as parallel as possible so that the colors will blend together and not appear to be separate shapes or objects.
Blending colors together to increase the three dimensionality of your designs is easy if you just stick to these two factors; density and direction.