I just did it the day before, here's what you need to do:
Install Ubuntu normally to the external drive.
When you reboot and are presented with a boot menu, hit 'e' to edit the entry.
Change (hdx,y) into (hd0,y), 'enter' to save, and 'b' to boot.
Once in Ubuntu, modify /boot/grub/menu.lst to make those changes permanent.