Their are two types of shooters they are knob turners and bag squeezers. I use to be a bag squeezer, but have changed over. (It is a hard habit to break, I have a friend that also changed over and he had to build a box around his bag to keep him from squeezing it.)
When I use to squeeze I would set the rifle up so that it was close, and then by squeezing the bottom of ears on bag, manipulate the rifle on target. (Much in the same way I do now with the knobs.) I would set the bag so that it was low on target , and I would squeeze the ears to make it go up, and be on target. (Now I turn speed screw to make it go up.) If I need a bit of windage I would squeeze one side of the ears harder than the other. (Now I turn a knob.) Basically your just looking for fine adjustment.
The problem with bag squeezing is you must be rock steady, and pay attention to what your doing. You may find that you flinch do to the gun firing next to you, or you relax you hold as your firing. This is why a lot of people have gotten away from bag squeezing, It is possible to unconsciously mess up a group.
To answer your questions, I have shot both ways free recoil, and pinned with squeezing. I prefer to pin the rifle anyway, (Even now with knob turning) But some times I will free recoil, but I don't allow the gun to move far, maybe a 1/2 inch. It is a personal preference.
Yes once you are on target you continually squeeze the bag during shots. You are fine tuning the rifles position, by squeezing it.
You can use a windage rest and squeeze, but your adjusting the rifle with the bag. The windage is just to get you close, you will make the final adjustments with the squeeze on the bag.
With that all said, there are famous shooters that have done well with bag squeezing, there is nothing wrong with the technique, but I would encourage you to try both. You may find that you shoot better as a knob turner. The problem with bag squeezing is it is so easy to mess things up, and such a hard habit to break.