Baggy/Loose fit clothing

I'm planning to make an outfit that's going to be very baggy, and as such, shouldn't look as though it's been painted on the body. I'm looking at something like this:

http://2.bp.blogspot.com/_T8jYXFlqo28/ScbX4PbJJXI/AAAAAAAAATs/lXcYAjvjCnA/s400/IMGA0622.jpg

To do that, would I have to make the item of clothing from multiple prims all around the body/arms etc and just try to make all the edges match or can I do with SL clothing layers plus 2 or 3 prims?

The slider in Appearance that is supposed to produce a loose, baggy look is not really much good. You can create the effect with prims, probably sculpty prims. However, you can do a remarkably convincing job of creating folds and wrinkles if you are skilled in Photoshop or your favorite graphic design program. Look around the very best clothing shops in SL and you'll see that's how it's typically done. You'll find some pointers about how to get started if you read through the stickies at the top of this forum. It takes a lot of practice to learn, but it's time well spent.

Yeah I've done some work in creating wrinkles and folds, I'm not amazing at it but improvement will come with practise, my main concern for this was getting something that hangs loose around the AV instead of being painted on, secondly to make sure the muscaluture polys of the AV aren't showing in the texture.

Sounds like I'll have to take the sculpty route as you say but will I have animation issues if I do that?

You might, especially if any of the sculpty pieces are on the arms. You just might have to create animations to limit the movement of your arms, in that case. Take a look around SL to see how people have handled the design challenge in making armor, however. You'll see that it's quite possible to make articulated clothing with prim elements that looks good.

Ultimately, though, I still think it's worth the effort to learn how to draw folds in Photoshop. A well-drawn texture is hard to beat, whether you apply it directly to the avatar body as a clothing layer or to a prim object. Even a carefully-designed sculpty item can look like a child's pre-school art project if you just slap a poor texture on it.

Any recommended tutorials for creating more intricate folds in clothing, I've done the method of creating the basic wrinkle in textures from here and tried to implement it in my recent work:

http://www.youtube.com/watch?v=QfboLe9W16A

I need a tutorial that teaches this a bit more advanced where you're getting multiple creases and folds coming together and looking realistic like in the arms of this jacket:

http://www.pierotucci.com/data/imgprodotto/10242.jpg

I'm also assuming that with the overall shading of the outfit, it's just gonna be a case of dodge/burn and guessing at where the highlights/shadows are gonna fall?
At least that's all I did last time I tried to make an outfit.