As far as HOW to actually pick up stitches, there is a video here
on how to do it.
As far as where to pick them up, I haven't actually used this pattern before but it sounds to me like you would do the following:
1) Cast on 3 stitches
2) Knit 4 rows (4 rows will create 2 garter "ridges")
3) Pick up 1 stitch on the side of your work in between these 2 garter ridges (here's where you would use the technique demonstrated in the video)
4) After step 3 is complete, you work will have rotated and your cast on edge will be the left hand side of your work (assuming you are still holding the needle with your stitches in your right hand). Now pick up another 3 stitches along the cast on edge. You will now have a total of 7 stitches on your needle.
Basically what you're doing is picking up stitches along the outer edge of your work to create a rounded edge.
Like I said, I haven't actually done this myself ... but this is what the pattern sounds like to me and how I would do it if trying it for the first time. Hopefully this will give you a place to start ... let me know if it works out!