How to...

Well, just install Steam on the drive. Once it's plugged in i'm sure it will show up in the folder browser. Remember, if the external harddrive isn't RAID then the transfer speeds will be like 480Mbps (Slow if you are running 10k raptor drives on RAID?). But if you have a ATA 133 harddrive (Old ribbon style) then you can and should use this, you wont see a bottleneck with USB 2.0 external 7200 RPM drive.

But, if you are using 10k raptors or comparable then you may notice a difference in game response times.

I say go for it, just install steam to the external and start installing!
I mean... once most crucial engine features are loaded into your memory, the game shouldn't run any slower than it would off of your average 7200RPM SATA drive. And I really doubt he has Raptors... let alone Raptors configured in RAID if he's asking how to install games to removeable media.