I will give you a little help...
1- when you create a post, on the area where you normally write the post, you add wherever you fill like this --> [photosmash id=X] where the "X" is the ID of the gallery. You can find the Id of the gallery on PhotoSmash Gallery Settings (on the wordpress admin area) and from the dropdown menu you will see the ID number on the side of the name of the gallery. After that you should see the gallery on the post.
2- Yes, you add a gallery and you add the photos one by one from the post.
3- If you correctly did the step one on this answer you should see the "Add Photo" with automatic add on "off". Your problem is just happening because you doing wrong the step one.
4- I am not sure but I think that if you set on the widgets the Gallery Type as "normal" and don't change the other options, you should get all pictures in there.
5- Yes, to see that wonderful slideshow you must install some kind of lightbox, my suggestion is for you to install "shadowbox".
Have fun!