How to create xp bootable external drive

It depends on
A) How the external drive is attached (Firewire, USB 2.0, eSATA, USB 3.0, network, string).
B) Whether or not your motherboard allows booting from said connection. Some will boot off USB, some won't.

What motherboard and type of external drive are you using? I've seen people boot off of thumb drives; no idea why they want to run that slowly.

Edit: Oh, the title asks "how to." The simplest way is to disable / remove all of your internal drives and install to the external drive. If you install to the external drive with the boot drive still attached, the external drive will not contain the second stage of the boot process, the MBR.

There are other ways; they have more steps.
 

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