I usually start out the difficulty at about 45, and pump it up every few levels.
This feels right. I tend to end up at about 75% difficulty with the slow increase in difficulty.
But I don't have to whack a rat a hundred times.
Currently difficulty is set to about 65 percent.
Endurance is maxed at 65.
My primary killing skill is Blade which is at level 55.
Level 7 Knight of the White Stallion
Rats, timber and regular wolves, mudcrabs, blah blah blah (read: low-end enemies) I can kill with one sword swing.
The average bandit fight lasts about 30 seconds. I have a real chance of getting seriously hurt during this encounter, at least at my current level.
I can handle two goblin melee fighters, but I cannot handle three. Run, run, run away when this happens.
Archers are no big deal, I just sidestep the arrow and charge them, forcing them to go melee.
I get a variety of encounters at this difficulty setting. I enjoy playing out of my comfort zone, I want the challenge to last throughout this character's journey, not just for the first five levels or so. My characters don't attack everything they see... often moving away if the encounter looks too difficult, at least above ground where I have that option. If something is too tough, I run away and come back.
Perfect example:
Just went into Timberscar Hollow. No problem at all with all the melee warriors until I got to the shaman. He kicked my butt so bad that I left, fled. My character had to go to town to get more alchemical ingredients to create more potions. (He has 100 or so gold, and cannot afford to buy ready-made potions.)
Then he went back. Just barely beat that shaman. I think the last health potion that I had created saved me. Accomplishment... a tough quest notched on the haft of his weapon. Overcoming the odds. Priceless.