Rather than tracing around an old cape, try using this template pasting it in to Word or Paint software, then tracing onto the material you want from the screen, or print it out.
The picture above is an image, that can be copied and pasted into Word (or Paint) software.
You might need to resize the image to fit (check it against your current cape size), but it will probably be right as 100% in Word.
If you want to add symbols (like knight's insignia etc) then copy and paste images into Paint and Edit Paste other images on to it.
In another blog soon, I will look at the material some people have used. Some people use paper for simplicity, but cloth usually looks more like the standard LEGO capes. Unfortunately woven cloth tends to fray at the edges, so some people treat it with materials painted on. In the meantime, there are some good ideas here:
http://www.minifigcustoms.com/node/5395
If you have any ideas or experience, please feel free to add comments or suggest other links.