You can do it either way. Personally, I use all milk for my liquid when making milk soap--no water. If you go slow, and keep the temp down, it does not have to turn brown...but it takes practice. Plan on a few brown batches while you learn how to work the properties of milk in soap.
Some people, to avoid messing with the volatile nature of all-milk soap, do what you're describing, and add the milk in at trace. That will decrease the browning factor, but it also decreases the amount of milk in your soap. Personally, I prefer the milk being the total liquid in the soap formula, no water. For a really low-risk way to add milk to soap, you could add powdered milk at trace, also.
If enough people would be interested, I'd be happy to do a couple of picture tutorials posted here. People could follow along? It would just be a very basic recipe, and it would probably be better to start with plain water, and then move on to working with milk.
How about a fresh cucumber soap lesson?
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NINjAPOODLE,
YOU COULD DO A VIDEO ON HOW TO MAKE SOAPS
that would be great!!!!