I keep the difficulty slider at default in the middle because I don't like the way it works. I want my character to do big damage, but I also want her foes to do the same.
What I do to make foes ‘hit’ harder is ignore my character’s endurance (so she has few hitpoints) and she typically runs around at level 20 with a single digit armor rating. That way, she can’t take many hits at all.
What I do to make my character ‘hit’ harder, is tweak out her gear, tactics, supporting attributes and skills as a mystic archer. I also limit how many hitpoints she has to shoot through by capping her (and therefore, her foes) at level 20.
All this seems to work and help give me what I want: My character can strike like a dragon or crumple like a butterfly.
I have a slightly different approach, which probably works out to the same thing. For warriors and thieves I set the difficulty slider a bit left of center (to make my character hit harder), and then I limit armor, and advance armor skills slowly (to make my character vulnerable.) I rarely use much in the line of shielding enchantment, since that makes my character too "safe," but I like the ability to one-hit kill with a poisoned arrow from the shadows. (There's something fun about hitting a daedra from afar, seeing it turn green, and then having it run toward you and fall dead from the poison right at your feet...
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On the other hand, I adjust the slider to the right of center if I'm playing a mage, particularly a Conjurer or Illusionist, since those characters should be more vulnerable to being hit, and much of their attack method is not affected by the slider anyway.
The best advice I can give about the difficulty slider is to just put it where it feels "right" to you. It's a trial-and-error thing for me. I don't believe in "super rats" that can survive a hit with a steel sword, but I think that an attacking clannfear should really do some damage to my character.