The kids used good quality chalk pastels. I found that my two year old loved these because she was able to use her hands to rub and smudge which she loved. We used heaps of bright colours as a base, smudging the chalk to create an even layer and then went over in darker colours with lines and patterns.
We then sealed the chalk so it would not smudge any more. You can use an artists spray on fixitive or just use hairspray as we did. We cut them out and stuck them on the wall, they could similarly be hung as a mobile.