By far the easiest way to create a new item is to think about an item that is currently in-game. A weapon, a piece of armor, a piece of bread or a scroll.
Then, you go to the installation directory, into the data/English/ folder and find the item. If it's a weapon you'll find it in CoreWeapons.xml. If it's an armorpiece you'll find it in CoreArmor.xml. If it's an item such as a scroll or an accessory, you'll find it in CoreItems.xml.
Then, copy the XML for the item you have chosen.
Paste it into a new file that you create in documents/my games/Fallen Enchantress/mods/yournewfolder/yournewfile.xml
Change the internalname to something completely unique. If you keep the same internalname, you'll change the item in-game instead of creating a new item.
Also, remove the <GameItemTypeArtDef> and all its children (unless you are creating new graphics). The <GameItemTypeArtDef> is already defined in the installation directory, there is no need to repeat it (in fact, you shouldn't, because the game will have to render two weapons instead of one for example).
Prerequisites determine how an item becomes available to the player for the shop and unit designs. For example shortbow has this
which means it will unlock when you have researched Archery.
It also has this
which means a faction with the "Archers" faction ability never gets this shortbow.
Instead of the shortbow, there's also "Shortbow_Tarth" which has these tags:
meaning the player has to have the Archers faction ability and then research Archery to get access to that particular item.
By default, all weapons and armorpieces are available for unit designs and custom sovereign creation.
To disable an item in custom sovereign creation add <IsAvailableForSovereignCustomization>0</IsAvailableForSovereignCustomization>
To disable an item for unit designs add <IsAvailableForUnitDesign>0</IsAvailableForUnitDesign>
If you copied an item, those tags may already exist. In that case you should not have duplicate tags.
If you wish to make an item drop randomly for heroes looting goodiehuts or doing quests, make sure the item has these tags too:
The likelihood determines how common it is compared to other items in the same category. The RarityDisplay is the category. There's Common, Uncommon and Rare, which roughly represents the game progress (common = early, Uncommon = first magical items, rare = good magical items). There are also higher quality categories, but they do not drop randomly.