The idea is called a 'Word Bowl'.
So what you do is think of a list of random words relating to the genre that you want to write in. You then write each of these words on a small strip of paper, fold the pieces of paper up and put them all into a bowl. Jumble them around a bit to make sure they are all mixed up and you don't know what word is on what piece of paper, then pick 4,5 or 6 at random. You can pick however many you want, I decided to pick 6.
The 6 words I got were;
Putting these words together I came up with this story plot;
Hero has a Nightmare in which the Gods reveal to him a Prophecy.
To fulfil the Prophecy he must journey across the kingdom to the secret Caves of the trolls to find a sacred artifact of the Gods.
On the journey he gets Captured by bloodthirsty Pirates and must find a way to escape.
The plot is only a loose one but that's where your imagination comes in. Now that you have a basic idea for where your story can go you can get to work on filling in the gaps and adding some extras.
I really like this way of coming up with story plots. Because you don't know what words your going to get it is totally random and finding a way to connect them together is great fun.
I would definitely use this method again if I got stuck for ideas or if I just fancied doing something a bit different and seeing what sort of plot I ended up with.
If you did this three or four times you could also combine parts of all the plots you came up with to create a bigger more elaborate plot, or you could run the plots alongside one another in a novel or novella.
On a side note, I also thought this might be a really fun game to play with friends over a few drinks in the evening.