Jpeg's often have compression artifacts, so better use non-destructive compressed image types, or just plain tiff, or whatever TG2 eats. It was mentioned somewhere lately, tga, bmp, I believe. Then the size of the file is not related to the size in TG2. You can blow a 10x10pixels file to 10x10 square miles. It all depends on the accuracy you need, the bigger the file, the bigger the accuracy. You might not need that if you add some internal displacements anyway.
I'd say, make a gray scale file of 1000x1000px and try to get your angled squares (or whatever you want) in there in strong black/white. That means a flat low area and a flat top area, once you displace this image map. Save as a basic texture, then blur a copy slightly and try that in TG2. If the now grayish sides are too steep, blur the copy a little more, etc. Hope this helps.