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If you install it onto the external hard drive, yes, it should still run while the drive is plugged in - as long as it keeps the same drive letter (e.g. D:, E:, F: etc) from when you first installed it (since the shortcuts, registry info points to that target drive). Be warned though that you may experience some performance issues because of its connectivity, especially if it's USB. If it's eSATA, then it may be fine as its speed is pretty darn good. Usually though it is recommended to install software on an internal hard drive because of speed issues, but technically this is perfectly feasible.
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