Read other folktales. As is the case with any kind of writing it is important to know your market. Studying other folktales carefully will give you a good idea of key themes, provide inspiration and also help to make your story more innovative.
Plan some key events for your folktale. Work out some a rough idea of the main aspects of the story. This will give you more focus and will help with the remainder of the planning.
Think of a message. Folktales are renowned for sharing a positive message about aspects of human nature and often create a myth.
Devise a plot. Like any other story, a folktale needs a well-structured story with an attention grabbing start; an unanswered question, conflict or moment of suspense in the middle; and a satisfactory resolution at the end, normally a happy ending where the hero is rewarded. Work out the main aspects of your plot and how you plan to achieve this.
Note key events. Your folktale should introduce new, interesting aspects on a regular basis. Think about what they're going to be, how they can sustain the reader or listener, and where they could potentially be incorporated.
Read some ideas aloud. Folktales are often passed on orally, so it's important to get the style right for this. Jot down a few lines and read them to yourself and to other people to work out if the tone and general feel is right.
Write a first draft. Keep thinking of how it would sound aloud so it doesn't start to sound too much like a written novel.
Proofread your folktale. Go through the entire story carefully. Make sure it reads well, has a good flow and avoids mistakes. Read it out loud to a friend to get an objective take.
Redraft. Taking into account any advice you have received and mistakes you have picked up on, write a revised version until you reach a satisfying conclusion.