First, you must go to a crafting house. There are two that I know of -- one in the northeast town, and one by the pub in the starting town.
Inside, you should grab the plyers, that way you can grab the hot iron and hold onto it (I will get to this later.) Then go to one of the stoves.
Tutorial Picture 1 The fire is out on the left one, so go up to it and press 'a'. This will light the fire, and use a piece of coal (you must have a piece of coal to do this, of course!)
But, if the fire is already going, just walk up to the stove and press a, to lay down a piece of iron, which will turn into a green bar.
Tutorial Picture 2 and wait for it to turn red.
Tutorial Picture 3. When it turns this color, grab it with your plyers and take it over to the water barrel. Water it ONCE, so that it will turn purple.
Tutorial Picture 4 Take this and go over to a regular anvil (not the crystal one. That one is used later) and press d, infront of it, and a screen will pop up, asking which you want to craft: currently you can either craft a blade or a watering can. You do not need to find a hammer, because you will automaticly use one when you craft.
Tutorial Picture 5 Go a head and craft four blades, just so you have a full selection of what you want to make. Now, go over to the crystal anvil and press a. Another screen will pop up. With four blades you can choose to make either: a scythe, a skull sword, a split sword, or a steel sword. If you only have three blades you can only make a steel sword or a scythe (these pictures of when you have 4 blades)
Tutorial Picture 6 Tutorial Picture 7. Select the sword, let it craft, and grab it and volia! You have a new sword.
Remember you must have atleast two pieces of gold to make the hilt.
That's it. Correct me if I am wrong anywhere please.