Windows XP does not require you to enter your password when you open the encrypted file. Once you log on to a session, encrypted files are available for you—and anyone who walks up to your system—to view.
Windows XP Home doesn't support this method. Both XP Home and XP Pro, however, let you create password-protected compressed files. To do this, right-click on the desired file and choose Send To | Compressed (zipped) Folder. Open the resulting folder and select Add a Password from the File menu; delete the original file. Note that this encryption is relatively weak. It should dissuade casual users but won't put up much of a fight against someone determined to hack it apart.