There are 4 difficulties: Casual, Normal, Veteran, and Elite, and in addition a hardcore mode. Can be seen on this video at around 2:50.

As the official site states:

Since there are no real benefits for picking hard difficulties other than fun (you don’t get better loot), you are free to play the game how you most enjoy. If you like being overpowered… you can play normal mode. If you like a serious challenge, play elite (which is much harder than very hard in TL 1). If even Elite is not enough for you, you will be able to easily download a difficulty mod and challenge yourself further.

The loot and drop rates don't change, only monster health and damage change.

And there is always the option to create your own difficulties with mods, to suite your specific desires.

You simply must wait for the circle to turn purple. You'll hear a sound too.

Often, the circle will go very close to becoming the right size, only to enlarge later, so don't be fooled by that. The circle will normally remain purple for a second or two, so you have plenty of time to react to the color and the sound without resorting to guesswork. So don't resort to guesswork.

If you do miss the window of opportunity - just wait until the circle turns purple again. You can do so with no penalty and this won't use up the fish hole more than once.

This is especially important on wilderness fish holes — they have better drops, but you only get 3 to 9 tries per hole: you do not want to catch nothing on these.