It's hard to imagine a military leader turning away able-bodied men when up against an innumerable force, but that is precisely what God is doing here! The Lord wants all to know the source of the victory they will soon achieve is from Him, not them. The army is quickly cut down by approximately two-thirds when those who are afraid are sent home. Having them around was not necessary lest others become fainthearted also (cf. Deut. 20:8). Only the willing volunteers were left now. God will use water to test the remaining ten thousand. Only 300 will be kept, which is less than one percent of the initial force! Truly the thoughts of God are above those of men! If our understanding is correct, the test at the water was used to separate the most alert soldiers from those who would more easily let their guard down. All 10,000 men were instructed to drink from the water, but only 300 dipped their hands in the water and raised it to their lips (enabling them to continue observing their surroundings). The majority, who got down on their knees and put their faces in the water, were careless and less alert overall (making them more vulnerable to attack). I find this test with water fascinating; even more intriguing is that God still tests men and women with water today (via baptism)! Some pass the test, but many fail (e.g., Luke 7:29,30).
After the army is shrunk to only 300 men and everyone else is sent home, God is ready to overthrow Midian under Gideon's leadership. It is implied that Gideon is somewhat timid again, perhaps due to the small number of soldiers that remain (cf. Jud. 7:10,11). God strengthens his faith yet again by enabling him to overhear a dream and its interpretation being explained in the Midianite camp - "'I have had a dream: To my surprise, a loaf of barley bread tumbled into the camp of Midian; it came to a tent and struck it so that it fell and overturned, and the tent collapsed.' Then his companion answered and said - 'This is nothing else but the sword of Gideon the son of Joash, a man of Israel! Into his hand God has delivered Midian and the whole camp'" (Jud. 7:13,14). That was the final encouragement Gideon needed. He expresses thankfulness immediately and springs into action!
He separates his men into three groups of 100. They are each provided with a trumpet, an empty pitcher, and a torch that could be put inside the pitcher (not exactly typical equipment for battle against an enemy as numerous as locusts; 135,000 to be more precise; cf. 8:10). The plan, which was executed perfectly (with the Lord's help) is to surround the perimeter of the Midianite camp with these 300 men. They will not expose their torches until all are in place (allowing them to get into place secretly). Then, following Gideon's lead, all would break their pitchers--exposing the torches--and immediately shout and play loudly on their trumpets. This threw the Midianite camp into a state of confusion. So much noise in the middle of the night from every direction woke them up and put terror in their hearts. Why? Because surely with that many trumpets and torches there were countless other Israelites bearing swords against the Midianities--or so they thought! Soon the Midianites are killing each other in the dark of night ("the LORD set every man's sword against his companion throughout the whole camp" - 7:22) and they flee for their lives from Gideon and his 300 men!
God's way is always the path to victory--even when the "wisdom of men" says otherwise! May we, like Gideon, trust God's word and obey Him to the best of our ability, knowing that the Lord is in control.