Ok so I did some testing.
<Bounds>0,0,2,2</Bounds>
This puts it in the top left corner, now i know im editing the correct thing.
Changing render color
<RenderColor>255,255,255,255</RenderColor>
as you can see, now they are white and in the top left corner.
Now i made a 16x16px icon with an E
Next is to tell the xml file how to use our image.
See my inventory item equipped icon section below.
<InventoryItemEquippedIcon>
<Bounds>0,0,16,16</Bounds>
<Padding>0,0,0,0</Padding>
<AlignmentEdgeDistances>0,0,0,0</AlignmentEdgeDistances>
<Margin>0,0,0,0</Margin>
<RenderColor>255,255,255,255</RenderColor>
<Alignments />
<DrawBackground>True</DrawBackground>
<MinimumSize>1,1</MinimumSize>
<MaximumSize>4096,4096</MaximumSize>
<Disabled>False</Disabled>
<Hidden>False</Hidden>
<RestrictToParent>False</RestrictToParent>
<MouseInputEnabled>True</MouseInputEnabled>
<HideToolTip>False</HideToolTip>
<Texture>itemequiped.png</Texture>
<TextureSourceRect>0,0,0,0</TextureSourceRect>
</InventoryItemEquippedIcon>
And final resutl: