It is my understanding that often warriors took on almost mythological characteristics needed for morale purpose or simple storytelling appeal. So how do historians methodologically separate out the basis for the legends from the legends themselves?
In your experience, do legendary warriors typically have a demonstrable outstanding personal combat record or is the legend entirely crafted for other purposes?
All examples would be great.
Do you mean epic or mythical heroes? By and large, they don't. That sort of 19th century style of directly separating fact from fiction isn't really regarded as a productive task any more. Rather, historians tend to pay more attention to things like performance, audience and reception to find out what the work can tell us about the society in which it was composed and performed. Achilles has very little to tell us about Bronze Age Greece, but it is a fountain of information on the Archaic.
The classic example of this is probably Moses Finley's The World of Odysseus, but there are countless more recent examples.