Upon entering the lake, you’ll soon find that there is a current that automatically pulls you along, and you can’t swim against it really. So, just go along with it over the waterfall.
In this next room, you’ll find a strange creature, a Parella. It will get scared of you and flee. Follow it (grab the Amber Relic from the ground on the way) and, in the tunnel, it will go through a hole in the boards. Start to swim and shake the Nunchuk to spin through the boards.
After that, the Parella will notice that you have the Water Dragon’s Scale, and therefore agree to take you to the Water Dragon. Continue along the tunnel, following the Parella, while trying to avoid the spiky balls. Further ahead, you’ll have to spin through some more boards and into another room.
Here, it seems that your path forward is blocked by some rocks. You’ll find some Froaks nearby – you can spin attack them into a wall or something to make an explosion. Do so and be sure it is near the rather obvious rock blockade. Afterwards, continue along the path to the next room. Here, you’ll need to jump over some iron bars – do so by spinning as you approach the surface of the water and you’ll jump over the barricade.
Continue following the Parella into the next room. Eventually, it will slip through a crack in the wall. Spin jump onto land and use the nearby Bird Statue. Nearby, you should be able to spot a treasure chest; it contains a random treasure . Walk along the ledge to the other side of the room and you’ll find a Goddess Cube . Hit it with a Skyward Strike. Return to the central area and through the enclosed area below.
There, swim through the tunnel to its end, then jump over the barricade. Here, you’ll find a large enemy fish swimming around. Simply spin into it a few times to finish it off and continue. The Parella will go ahead to the gate. Meet it there and the Parella will unlock the door here by using its head as a key. O_o
Anyhow, go through to the Water Dragon’s room. There, swim forward and spin onto the ledge. Speak with the Water Dragon, Faron, and you’ll told about her encounter with Ghirahim, the reason why she is in a healing basin at the moment and not so physically high-and-mighty. As a test, you’ll be asked to get her some more sacred water to fill up her basin some more. Agree to do so.
Afterwards, swim to the back of the room and spin jump onto the ledges. Climb and go through the back door. Outside, use the Bird Statue and head to the right and back to the woods.