How to select a paragraph using 3D Touch
When you use 3D Touch, there are two levels of pressure that it can detect. In order to use the keyboard as a trackpad (to control the cursor position) you only need to press to the first level of pressure. This is important because the "deeper" or second level of pressure is what enables selecting text.

Once you have control of the cursor, move it so that you are in the middle of a word (if you weren't already). Then "click" harder on the screen and the current word will be selected. Drag the cursor around to select additional words.

To select an entire paragraph, after getting control of the cursor, you need to "triple click" just as you would on a real trackpad or with a computer mouse. The difference is the "clicks" are hard presses on the screen.