There is no "optimal" size, as in a size at which the best results are obtained. The "optimal" size is the best balance of *per-meter resolution* and file size/memory available. The default is 1 meter "pixel spacing", i.e. 1 pixel = 1 meter, but that can be adjusted with the built-in Heightfield Resize node. There is no significance to the 1 meter default pixel spacing, we just need to pick *some* value when the imported format does not include its own scaling information. So don't take the 1m default and just assume that's the way it should be or the best way.
That leads to the second part of my response, which is about the source of your base terrain data. Are you creating this terrain yourself, or is it real-world data? If the latter, you should just source the data from somewhere that includes georeferencing information and then use a format like GeoTIFF that maintains that data. Then you'll get the correct real-world sizes. If you are creating the terrain yourself in another application, then the best approach depends on what application. If it's a dedicated terrain modeler/generator like World Machine then export in TER format and it should maintain scaling information and the scale in World Machine should match that in Terragen (the same should be true of any other major terrain editing tool such as World Creator, etc.). If you're just using something more like a paint program, e.g. Photoshop, then you need to figure out scaling on your own. Decide how big of an area you want to cover, and then the higher the resolution of your image, the more detail is going into *the same size area*. When you import into Terragen just use the Heightfield Resize to adjust the size (in meters) to what you intend.
The heightfield should conform to the planet by default. But Planes and other objects *do not*. Only the Lake object (under the Water layout/tab) has that capability. So if you want a very large body of water that conforms to the planet, either use the Lake object, or in many cases better yet just use a second Sphere with a water shader, and set the sphere radius to your base planet radius+the height of water you want.
- Oshyan
