I asked this same question a few weeks ago here. There are lots of tips on there.
It doesn't sound easy though.
Admittedly I wanted to size up adult clothes but I would have thought that it is harder for children's clothes because it isn't just their height and width that changes but their proportions (leg/arm length in relations to their body).
Depends how good you are but I have chickened out and not bothered.
Lovely fabric by the way. It would make gorgeous dresses.
I think it's easy to size up a pattern! although, for this one, I don't think i'd bother sizing it up - I would take your DD's measurements and just make a pattern from the drawing. (but that's just me - i'm quite good at that kind of thing....)
You could always try the sizing first on an old sheet or something before you committed to doing the adjustments for your younger DD. That way if it didn't work or needed lots of fiddling before you got it right, you wouldn't have wasted any money.
(ps - i'd get the bigger one and size down for the 2yo.
it's pretty easy - work out your 2yo's measurements, and look at the pattern. then each measurement it gives on the pattern, reduce by that amount.
okay, say that you've got 3 pieces on the front of the dress (2 sides and one centre front) - if the difference in measurements are 20 cm all round, assume 10cm for the front pieces. you then have to divide that 10cm by the number of seams you have. for 3 pieces, you've got 6 seams, so you would reduce each seam by 10/6 = 1.67cm.
do the same with the back pieces.
bear in mind that all length measurements will be different too - my recommendation would be th ignore the length, and concentrate on the armholes (this only works for children's garments cos their shapes are not so different). measure the armhole for the older size, then put a piece of ribbon/paper to that exact size against her armpit. (around the upper arm) see how much it allows for movement, then apply that logic to your 2yo by measuring round her armpit with paper or ribbon. then measure it (say it's 25cm or something) - work out the measurements on each garment, and divide your ribbon by that much - you will see that it's rounder on the front of the armpit than the back.
you can work it all out on paper by tracing the pieces that surround the armhole of the garment to see the shape, then put your 2yo's ribbon on a new piece of paper to that shape. then apply that to the (already re-drawn) pieces for the 2ro's pattern.
the length, as i say, don't worry about - just make it up with the side seam/armhole (and the same adjustments for the neck line as for the armhole - use the same method), and put it one 2yo and work out the correct hem length form there.