permalinks and .htaccess question

Ok, I’ve read a lot of permalink codex and the some of the suggested “other resources.” So much so, I’m getting a bit confused.

So, if you don’t mind, I’d just like to make sure I have all the steps correct.

I went to Dashboard – options – permalinks and selected the second option – date-post name. Then I viewed my site, clicked on a test post I made to test the new permalinks and got a page saying not found on server. I assume this means I need to do something like suggested in codex and add a .htaccess file to my sub-directory. WordPress is in its own sub-directory (www.mysite.com/wordpress) but it is the top level domain when people go to http://www.mysite.com (did I express that correctly?)

I should tell you now that sub-directories, code etal is all new to me. Just learning.

Please tell me if I am correct in thinking I need to add a .htaccess file and if the following steps are correct.

1. I go off-line, open a text editor, create a blank page and name it .htaccess taking off anything like “text” added by the text editor.

2. I open filezilla, click on .htaccess file, click on properties, enter 666 in the box, upload to my server.
Because WP is my main site, I make .htaccess its own sub-directory. My file manage currently looks like this:

wordpress
index.php

and after doing this it will look like this:

wordpress
index.php
.htaccess

Then, I go to dashboard and change to the date/postname option. Update.
Then I go back, use filezilla and change the permissions to 664.

Is this correct? Did I miss anything?
Thanks for your help