Does windows boot from External hard disk?

Have anybody tried concept of booting a windows OS from portable hard disk? I have used VMware for using windows XP inside windows XP for some reason. I was wondering because I have very good software which runs only on windows XP. But currently my laptop has windows 8 OS and I cannot format my laptop. Can anybody share the details on how one can install OS into a hard disk and boot from that hard disk when hard disk is connected. My strong feeling is that it can be done but may be with some limitations. It is okay if audio and video drivers won’t work. Hard disk will be kept dedicated to alternate OS. Expecting quick support.