You choose four adjectives that describe your character. The goal of these four adjectives:
1. Between the four of them, they must pretty much COMPLETELY encompass every aspect of your character. This means they should be appropriately general, as you need to spread them pretty far to cover as much of your character as possible.
2. They should not overlap or duplicate each other. Ask yourself, can my character be X without being Y? If not, then X and Y do not *both* belong in your character diamond.
3. Each adjective should be a TRAIT, i.e. it should affect the way your character acts, speaks, and possibly even looks. So "wealthy" is not an appropriate adjective, as it doesn't affect the way a person acts. But "materialistic" or "snobbish" could well be.
4. No more or less than four. Less, and your character may be too simple. More, and you may not have a good handle on your character. A real-life person might need more than four adjectives, but a fictional character shouldn't (especially if you're adhering to guidelines 1 and 2). Any more than that and your audience may have trouble creating those fun mental expectations of how your character might react to various things. They'll never really feel they "know" that character.
5. These are traits, not states. They are unchanging. (Diamonds are forever!!!) "Naive" CAN be a personality trait, but only if you are that Teflon type of person who just never, never, never loses her innocence.
Now... to mix it up a little, I've made a game of it for myself. This part is in no way necessary to the process, it just helps me make it fun. In EQ, I did one based on race, one based on class, one based on deity, and one wild card. But in WoW I'm going to do something a little different. Inspired by my recent marriage:
Something old: A trait typical of the race, hardwired into his ancestry.
Something new: A way in which this character is a bit of a "rebel" or stands out from what you'd expect of the stereotype.
Something borrowed: A personality trait "borrowed" from his class or profession. Not exactly accurate, since the personality trait is inborn, and they probably chose the profession based on their personality, rather than just adopting this trait because of their profession, but hey, it's a mnemonic, so sue me.
Something blue: This is something just for "color." This should be the trait that makes the character most interesting to others, that draws others to them - the one they'll remember most. This is often one of their most likable or at least interesting traits - the reason people choose to spend time with them. It can be something related to race or class OR something a bit unusual, but its main purpose is to make this character *interesting.* It differs from the "something new" in that a person can be unusual for their race/class without being interesting or likable. For example you could have a rogue who's a little slow-witted. Or an extremely quiet gnome, or a selfish Draenei.