I think your major confusion is in saying that a set cannot be a member of itself.
The now, one asks if M is a subset of itself. Most probably he would hear a know but,
since M={1,2,3,4} and again I write here M={1,2,3,4}, {1,2,3,4} can be replaced with M.
Thus,
M={1,2,3,4}
M={M}
Thus all sets are subsets of themselves. Now, there is no set x such that x∉x and thus there is no set A where A={x:x∉x}. So where is the paradox?
First, x and A are different things, so it's best if you call x a set and A a class. All sets are classes (you can define a set as being the collection of all sets that are members of x), and our intuition may prompt us to think that it also works the other way around. Russell's paradox comes into play when we assume the latter.
Let us refer to x as being "set variables", which can be quantified using predicate calculus, etc. Class variables, on the other hand, say something about all possible sets that meet a particular condition. For example, for all sets x, x is an element of the Russell class iff x is not an element of itself.
Now - we need two rules in order to prove Russell's paradox:
the fact that \neg(\varphi\leftrightarrow\neg\varphi)
which is a theorem of classical propositional logic
and a standard axiom of logic,
\forallx \varphix \rightarrow \varphiy
which should be read "if it's always the case that \varphi, then we can substitute y for x in \varphi (\varphi is a well-formed formula that says something about x), and the resulting well-formed formula will also be true with the substitution.
Now, by definition of the Russell class, and using the axiom of Extensionality,
\forallx, ( x \in Russell \Leftrightarrow x \notin x ).
Using the above-described quantification theorem of predicate logic, we infer that
Russell \in Russell \Leftrightarrow Russell \notin Russell
But also notice that this contradiction only holds if we either assume that Russell is a set (in which it would be a member of the universal set automatically) or that Russell is a member of the universe. Either way, Russell class's membership of the universe implies this contradiction, so it must be the case that the Russell class doesn't exist.