I'd also make sure you put up a real good waterproof membrane (like 6 mil vapour barrier) over your wall insulation and caulk it to the lip of your tub with something like accoustical sealant before putting up the Dens-Shield over top of it. You want to run the Dens-Shield down to about 1/8 inch above the lip of your tub, and have your bottom row of tiles hanging down in front of that lip to come within about a 1/16th of an inch from the tub.
First, put a piece of carpet pile side down in your tub to protect the finish.
Basically, once you get your vapour barrier up, caulked to your tub, your backer board and Redguard or Dens-Shield over that, then you should attach a piece of STRAIGHT wood molding to the wall all the way around the tub. The distance from the top of the tub to the top of that wood molding should be about 1/2 inch less than your tiles are high, so that you'll be cutting about 1/2 inch off the bottom row of tiles.
I prefer to use 6X8 inch tiles because they're the largest size that I can comfortably hold with one hand while back buttering the tile with a trowel in the other. Also, I prefer to set them in the "landscape" orientation. You rarely see that done, so it allows me to get a "custom" look using plain jane tiles. I prefer using plain jane tiles because you can always get 6X8 white, cream or light blue tiles so that you can always fix the tiling even though your original tiles may not longer be available.
Once you've decided on the size of the tiles you're gonna use, and the orientation you're gonna use them in, mark a HORIZONTAL line around the tub walls that's about 1/2 inch (or less) than a full tile height above the tub. (check with a tape measure to ensure that no corner of the tub is more than a full tile height below that horizontal line. Now fasten a straight wood molding so that it's flat top is right on that line all the way around the tub enclosure.
Now, you wanna set your bottom row of full tiles ON that wood molding (so they don't slide down the wall as the thin set cures). Basically, you want to set all your tiles above the wood molding, then remove the wood molding and cut your bottom row of tiles to fit down to the tub. That way, your tiling grout lines will still be horizontal and vertical no matter how crooked or out of level your tub is.
Once you know the tile size you want to use, buy some spacers (typically 1/8 inch wide for 6X8 tiles) and set a row of tiles out side-to-side on the floor with spacers between them. Also do a second row on the floor with the tiles set end-to-end with spacers between them. Using those two rows of tiles, measure from your wood molding to your ceiling to find out how tall a tile you're gonna end up with at the ceiling. If it's anything less than 2 inches, use a row of horizontal accent tiles somewhere in your tiling that's 2 1/2 inches wide so that your top row of tiles will be nearly full height.
To do the wide wall:
Use a large carpenter's square, or a 3,4,5 triangle to draw a vertical line through the "starting point" on your wood molding. Pick the starting point so that the tile width in the corners is about equal at the front and back of the tub. Typically, this will require either a tile or a grout joint in the middle of the 5 foot wall; one of the two. Draw a vertical line through the starting point. Using the end-to-end row on the floor, determine where the edge of the last full tile before the front corner will be. Mark the molding about 1/8 of an inch closer to the starting point near the middle of the wall and draw a vertical line from that mark to the ceiling. Do the same for the back corner.
Using the side-to-side row (I'm presuming you'll be using 6X8 tiles in landscape orientation) on the floor find out where three tile heights above the wood molding will be on the wall. You can use two or three tile heights, it doesn't matter much. Mark a horizontal line on the wall about 1/8 of an inch below where the top of the second or third full tile above the wood molding will be.
Now, use 2 inch wide painter's masking tape to tape off one area to be tiled. Tape off the wood molding, the vertical line through the starting point, the vertical line near the corner and the horizontal line just below the 3 tile height. Spread your thin set onto that masked off area with a V notch trowel, and then pull off the masking tape and you have your thin set perfectly spread over the area to be tiled without having spend extra time spreading it carefully. Now, back butter each tile before setting it in place. The beauty of tiling this way is that even if the thin set on the wall dries up and skins over, the moisture from the fresh thin set on the back of the tile will reactivate it, and the tile will stick just as though the thin set on both the wall and the tile were wet when the tile was set.
When setting wall tiles, I've seen some people hammer on them with their fist to "set" them solidly. That's just dumb. All you need to do to set them properly is to set them in position and then press firmly. That's it. Also, when spreading your thin set on the wall and back buttering the tiles, it's a good idea to have the trowel ridges all oriented in the same direction. That ensures that the faces of the tiles should all be pretty close to flush with one another. When I tile, I trowel the thin set on the wall so the trowel ridges are all vertical, and when back buttering the tiles, I spread the thin set over the back of the tile any old way, and then make a pass from one long SIDE of the tile to the opposite long side. That way, when I set the tile in landscape orientation, the trowel ridges on the wall and tile will be in the same direction and mate together well.
I do not use polymer modified thin set. I've tiled all the bathrooms in a 21 unit apartment block and in 20 years not a single tile has come off of it's own accord. And, the very few I've had to remove have been light fighting with a bear to get off. Using a polymer modified mortar is not going to help your tiles stay on any better or any longer, it'll just make then darn things even harder to get off if an when you need/want to remove one or two for repairs. Besides, after setting your tiles, it's a real good idea to fold a piece of sandpaper in half and run that sand paper through the still empty grout lines to sand any thin set off the edges of the tiles. If you use a polymer modified thin set, then the thin set will dry a lot harder, and sanding the thin set off the tile edges will become a real chore. Pros simply clean off any thin set that's right near the face of the tile and rely on the grout to cover the rest of it, which is reasonable to do, I suppose, but I'm a bit of a perfectionist and I would take the time to remove the thin set from the tile edges.
It's late, I'm tired, but I've tiled lotsa bathrooms and I can probably answer mosta your questions. You know enough about how to proceed for now tho.
For the time being:
a) stick you tub drain stopper in the drain hole and tape it down with masking tape so that it doesn't pop out and fill your P-trap with junk.
b) put a piece of carpet with the pile side down in your bathtub.
c) remove all our old plastic tiles
Is that plaster or drywall behind the tiles?
It's not really necessary to remove all the plaster. If the plaster is in good shape above that rotted out portion, you do have the option of removing the old mastic and tiling over it with thin set. Most people would bark at me for saying that because they think that all the plaster or drywall should be replaced with waterproof tile backer panels, but the way I look at it, if that plaster has lasted this long with only plastic tiles on it, it'll last many times longer with grouted ceramic tiles over it, and that might carry us well into the next century. Most of the water that leaks into the wall to cause damage to the plaster is on the bottom 1/3 of the wall height, and that's gonna be true regardless of what kind of tile is on the wall. When the new tiles need to be replaced years from now, the top half of the wall is still gonna be in decent shape. It's only the bottom half that that the shower water sprays on.
If it is plaster, most likely it'll be washed out in places with voids along the horizontal and vertical joints between your plastic tiles. As you get higher and higher up the wall, the plaster should be in better and better condition.