Step 1: Pick a story. Think about what images you will need to tell the story. Is it a story that you can learn and tell without the book? Two books we have turned into felt stories are Bark, George (mother dog, George, cat, duck, pig, cow) and Dog's Colorful Day (dog and a bunch of colored dots).
Step 2: Photocopy pictures for your pattern. The best pictures have a clear enough shape that you can mostly tell what it is from the outline. You might have to find pictures from other books or draw something freehand if you don't find a clear picture in your book. There are also books of felt patterns. Check your local library.
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Step 3: Cut out your pattern pieces and select your felt. Remember that the pictures and colors do not have to be exactly like the book. Also remember to think about what color your felt board is. You want to pick colors that will stand out against your background. As an example I've cut out a kitten-shaped pattern and I chose orange felt.
Step 4: Tape your pattern pieces to the felt you want to use. You can
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Step 5: If there are any pieces that need more than one color felt, you can cut out the smaller piece from your pattern, repeat step 4, and glue the smaller piece to the larger piece
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Step 6: Add details to pieces. You can use a permanent marker or fabric paint. You can add google eyes, feathers, bits of cloth, yarn, sequins... keep it simple or make it elaborate.
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Step 7 (optional): Write a script for your felt. It's possible that your book might not always be around. And some stories might not need all the details that are in the book. Think about what someone unfamiliar with the story would need to know to tell the story. Are there particular phrases that are important or repeated? Include instructions for how to place felt pieces so that anyone could pick up your script and tell the story.
So now you know how to make a felt story! Or maybe you already knew... so who's got some felt-story-making tips for me?? Do you make yours a different way?
ETA (9/17): Ooh, you'll also want to check out Lisa's post about making magnetic board stories!