This is kind of a two-step process in MC.
The first step is to tell MC to analyze your audio files. You do this by selecting all of the music you want to analyze, then right click on them and choose Library Tools -> Analyze Audio... When the box pops up, it should list all of the files you selected. Then just click the Analyze button. Depending on how many files you're working with, you may want to go grab a drink. Or dinner. Or watch a movie. Or maybe even go to bed for the night if you're analying thousands of files.
Once that's done, you need to go into the DSP Studio. You do that by going to the Player menu, choosing Playback Options, then DSP Studio... Once in there check the box that says "Volume Leveling". Then just set the options you prefer.
Under Mode you have two options. Track based and Album based. Track based will make all tracks the same volume, but if you're listening to a full album that has gapless tracks (like a live concert album) then you may get strange results due to the tracks all being at the same volume even though they shouldn't be. That's where Album based comes in. Using that setting, MC will make sure the entire album plays at the same relative volume, but each track may be quieter or louder than the others if that's the way it was made. If that makes any sense. I'm sure somebody else could explain it better. Fire up a live album using Track based mode and you'll pretty quickly see what I mean. I generally leave it on Track based with the intention of changing it to Album based if I'm going to be listening to an entire album. There have been requests in the past that MC automatically detect what you're listening to and adjust this mode accordingly, but I'm not sure if that was ever implemented. Anybody else know?
Next there's the Adjustment option. This is where you set the "Automatic based on current playlist" option that you mentioned. You can also set it for a fixed value or none at all, but I always just leave it on Automatic.
And last there's Overflow Handling. It's not really a Volume Leveling option as much as a general DSP setting, but since it's here you might as well set it. I think the default option is Clip protection, which seems to me like a good idea, but somebody more knowledgeable on the subject may have a different opinion.
So that's it in a nutshell. I think my post probably makes it sound more complicated than it is.