First you must collect the following items in the game.
Black Mushroom: Act 1, Randomly spawns in a corner room on any level of Tristram Cathedral (Thanks 420 & Throbblefoot)
Leoric's Shinbone: Act 1, Leoric's Manor Fireplace.
Wirt's Bell: Act 2, Can only be purchased from the merchant "Squirt the Peddler" for 100,000 gold. (You do get an achievement for it.)
Liquid Rainbow: Act 2, Dahlgur Oasis, Mysterious Cave dungeon. Search East side for one of the South facing inlets. You will find the Alchemist (full name?) being attacked by ghosts. He opens the door to the dungeon. Find the "Mysterious Chest" in that dungeon. Both the alchemist / dungeon are a random spawn and the chest inside is also a random spawn.
Gibbering Gemstone: Act 3, Fields of Slaughter, Cavern of Frost dungeon. Dropped by a randomly spawned Vile Frost Stalker boss named "Chiltara" (purple name) (Thanks 420 & Throbblefoot) Dungeon and boss are both random spawns and item is a random chance at a drop from the boss.
Plan: Staff of Herding: Act 4, random chance to drop from Izual.
Once you have the plan, use it on the blacksmith to make the formula. If you have the five pieces then you can make the staff for 50,000 gold. Then once you have the staff, just put it in your inventory, and walk up the road from New Tristram to the ruins of Old Tristram. Along the way you will meet an old friend who will open the way to sunshine, cupcakes, teddy bears, and everything sweet and wonderful, which wants to kick your ass.
The staff may be used and swapped across any hero in your account but not across regular to hardcore and vice versa. Hardcore heroes will need their own staff.
You must use a hero who has killed Diablo to enter the area. Like the D2 Cow level: Kill Diablo in normal - opens secret level in normal from Act1 area. Kill Diablo in Nightmare - opens secret level in nightmare in Act 1 area, etc.
(I have heard that the staff must also be upgraded to be used in nightmare and higher difficulties. To be edited when the method(s) for doing so is(are) known or disproven.)
So If you want to go to that magical, scary, place and don't have the staff to do it, and you see me on, I can take you there in normal so far.
-Cuchulann -aka in D3- Fogtreadder.