A side effect of having a thirst for travel is that it will always be unquenchable. You will never be able to see everything, experience everything; there will always be so much you miss. That is why your itinerary is so important and yet so difficult to set.
If you read my article on how to research for a trip you'll know that I go through a great number of resources and have a lot of travel content coming to me on a daily basis. As a result, my visit list for any given locale is longer than most from the outset. This is both good and bad. On one hand I have a great start for my itinerary, yet when it comes time for cuts to be made it makes it that much harder to skip over destinations you've dreamt about for months, maybe even years. Such is the life of a budget backpacker.
Create a Map
The first step is always to add my destinations to Google Maps so you get a map similar to mine. There is one main advantage to this exercise; you can see very easily what a suitable route would be. Look for where to start, where to end, how to eliminate backtracking and find any destinations that aren't reachable from your other destinations.
There is something to be said for travelers without a strict itinerary, but you still need to have a general idea of how you are going to travel the region. You do not want to end up like a backpacker friend of mine whose route after 6 months in Europe looked similar to several Stars of David. He wasted a lot of time criss-crossing the continent several times. You should try to choose a route that flows and doesn't require retracing your steps. If you decide on a round trip plane ticket, a circle of some sort is often ideal.
I always start by writing my newly created itinerary down on paper. Using paper makes it much easier to brainstorm and adjust the first iteration of your plan. Above you can see what my first draft looked like. Pretty? Not in the least, but it's functional and allowed me to plan freely. Use a guidebook to look at the activities and sights for each destination, and make an educated guess on how many nights you will spend there. A good tip is to plan by the number of nights you will stay rather than days, as they can get confusing if you move around a lot or go on day trips.
For my South-East Asia trip, I was trying to stuff a little too much into my time frame, though this was exaggerated as I have a full week of unbudgeted time built into my proposed 120-day schedule. This was one of the biggest problems with my trip to Europe, I was tightly budgeted and although it was an excellent itinerary, not too fast or too slow, it afforded me no flexibility, and I wasn't able to stay long in the German Alps like I wanted.
Ask for Feedback
Slimming down your route is full of hard choices but you can make it easier on yourself. You're not alone; if you're going there, then someone else has already been there. Now is the time to bounce your itinerary off as many other travelers as possible. The Boots'n All forums as well as other location specific travel forums are a great start; any feedback will help you grasp the situation.
One of my biggest problems was that I couldn't get a handle on how much time I should be spending in the major cities of the region, unlike Europe where a 4-5 day rule is fairly universal. I was lost so I turned to my fellow travelers on Boots'n All, and they responded in spades, with more detail then I would have expected.
Just like reading an essay out loud will help you find typos, explaining an itinerary in detail to a travel partner or friend will help you bring holes and unnecessary destinations to light. This is what I did when I bounced my proposed itinerary off my buddy Richard who will be joining me for some of the time I'm in South-East Asia.
If you're looking to make cuts, then focus on destinations that you don't immediately gush about. If you're not excited at home, what are the chances that it'll be any better on the ground? This is exactly what I did with Railay Bay, a beautiful destination known as a rock climbing mecca. Me and heights aren't always on speaking terms, so that was an easy decision.
Any place that only has one reason for you to going may need reconsideration; if it's not a major reason then it's probably not worth your time. Phuket got cut down to one night because of this. The only real reason for going is to witness the spectacle of the sex tourism industry; the entire stop is basically an exercise in laughing at sex tourists. Even at one night, I'm still considering just axing the whole island.
It is important to remember through the whole process that even if you must cut some destinations, you will return with nothing but good memories, and any disappointment will fade quickly when you remember what you did experience.
Though mostly set, my itinerary is still in flux, and will likely stay that way until I leave. Once I'm on the ground it will change drastically: travel mishaps happen, my usually ironclad stomach may fail me, a civil war could escalate, or the proposed elections in Burma could throw the country into turmoil. The flexibility I have built into my plan should allow me to bounce back from setbacks, and with any luck I'll finish my stint in Hanoi with time to visit another tiny South-East Asian country.
You can review current iteration of my schedule on Google Docs. Feel free to comment or ask questions.