I use an external for my iTunes Library. Couple of ways to do it, depending on whether you want to let iTunes manage your Library or not.
Don't have to de-select 'Copy files to iTunes music folder...' unless you want to. I still let iTunes manage my Library.
On that same tab, just change the location of your iTunes Music folder to the location your keeping it on your external.
The only real issues I've found relate to launching iTunes when your external is not connected.
1) If you go to importing or playing anything that auto imports to the Library, iTunes will change the location back to the default.
2) If you have any podcasts set for auto download, once again iTunes will change back to default location since it can't find the external.
I do this on occasion, just have to remember when you change the location back to your external, you'll also have to import these into the now changed Library location.