How to Encrust?

So i played a lot of COTW already but i can't manage to encrust something i had Gaga's Glaze (Helmet) but when i tried to encrust it didn't work i don't know what it is do you need a specific helm or something it keeps telling me you must place a suitable item in the encrusting window if anyone could explain it i would be happy

 

Right of the "Craft!" Button there is an empty window.
Put the item you want to encrust in there.

 

Thanks