Each students will need one file folder; I used the legal size when we did these for Where the Red Fern Grows. Then you will need hundreds of "matchbook papers," which are essentially 3.5 by 6 inches pieces of white construction paper; 3.5 by 6 inches is an approximate size and can vary depending on your novel and the number of chapters in it. Cutting your construction paper is really the most labor-intensive part of this whole project (well for you, anyway:-).
After completing each chapter, each student gets a "matchbook paper." They fold the bottom "tab" up about 1/2 inch. The top side then gets folded down until it lines up with the crease from the tab.
I give each student a small ziplock bag to store all of their matchbooks for the duration of the novel study. We don't glue them into the file folder until the very end when all matchbooks are complete. This allows them to arrange and fit them into the file folder appropriately. They look so nice when they are all complete, and they come in handy when students need to refer back to the text, but aren't exactly sure where a particular event occurred in the book.
Students then add the finishing touches by decorating the cover of the file folder.