Visit a home store and decide what style of wainscoting you want. Panels are usually 4 x 8-ft sheets and wainscoting is usually 45" from the floor (including base moldings and top railings). They are available either as prefinished or ready-to-finish products.
Determine the number of panels you will need by measuring the perimeter of your room and then divide by the width of the wainscot panels. If the result is an odd number, round up to get an extra panel.
Bring the wainscoting paneling into the house when you get it and allow it to acclimatize to your home for a few days before beginning installation. Wainscoting is a wood product that will expand and contract with moisture and temperature, so it's best to let it move before installing it.
Clear everything off the walls in the room, including switch plates and outlet covers. If possible remove all the furniture and carpets to give yourself space to work. If that's not possible, move everything to the center of the room and cover it.
Remove all of the existing baseboards and any molding on the walls. Use a stud finder to locate (see "How to Locate a Wall Stud"), then mark where they are in the wall. This will be really helpful when it's time to do your top and base molding.
Measure up 42 1/2" from the floor. Using the level, mark a level line all around the room. Floors are rarely level so coming up 42 1/2" will make sure the top of your wainscot is level all around the room. Base moldings will cover any discrepancies at the bottom and the top/chair rail will raise the overall height to around 45".
Start in a corner. Install the first panel 1/16" from the corner and make sure the top is level with your line. You can use either panel adhesive or paneling nails to install your panels. If you are nailing, remember you will need to set every nail and fill the holes after the panels are hung and finished. A compressor nail gun makes a good alternative, since it drives and sets the nail at the same time.
Work your way around the room applying the panels 1/16" apart and with the tops even with the level line. If one of the panels falls over an electrical outlet, you will need to measure where the panel hits the outlet and cut the panel to accommodate it.
Place caulking in the gaps between the panels. This will allow the panels to move with changes in temperature. Later, finishing the caulking the same color as the wainscoting will make it virtually invisible.
Install your new baseboards (see eHow How to Install Baseboard) and chair rail/top molding. (See "How to Install a Chair Rail").