Unlike engraving, where a sharp pointed tool is used to cut a pattern into the steel, etching relies upon a mild acid to cut a design into the steel.  The first step is to completely cover the surface with an acid resisting material such as paint or was.  The desired pattern is then scratched into the surface, selectively removing the acid-resistent material.  Acid is then applied and this causes the pattern to be cut into the steel.  Sometimes visual contrast is enhanced by adding a material to the recessed areas (e.g., lampblack), or by gilding the background.   This technique can be used to create very elaborate designs, often pictorial in nature, or complex inscriptions.

Another method is to create an "etching plate" with the requisite design in reverse.  The acid resist material, such as beeswax, is applied to the plate and then carefully scraped so that the design is completely covered.  The plate, with the design filled with wax, is in then pressed firmly on paper using a board.  Afterward, removing the board leaves the wax pattern alone on the paper.  This is called a "transfer" which can then be mixed and matched with others as they are placed on blade to complete the design.  Rubbing firmly with a bone makes the wax design adhear to the blade. Wetting of the paper allows it to be removed, leaving only the wax on the blade which can now be treated in various ways with acid to transfer the design in wax on to the metal, generally leaving a raised-type pattern.

Example of Etched Design on a Sword Blade

Example of Etched Design on a Sword Blade

Around 1880, deep etching became a lower cost alternative to mechanical stamping that allowed more elaborate trademarking identifications on blades.

Etching and Engraving are often confused.  An illustrated glossary of hand-engraving terminology can be found here along with explanations:  Hand Engraving Glossary of Terms