If you are compressing your files, I'd opt for mp3 instead. Simply because it is more of a standard nowadays than ATRAC, which can only be played by Sony devices I believe. And you will be able to burn mp3s on a disk to play on many a stand alone player, diskman, whatever. ATRAC is said to perform better than mp3, never heard any to judge though.
There are loads of easy to use mp3 encoding programmes available. I myself use CDEx, freeware that uses a LAME encoder. The latter guarantees good quality mp3s. If you encode at higher bitrates, say 256 or above, you will be more than hard pressed to hear a difference when there is living room noise around. The lossless shn format makes you lose about half of the filesize (which is not much if you want a kazillion titles in your jukebox) and is only interesting if you want to make sure quality remains at the highest level.
As for the volume, just adjust the line out level to perform comparable to your other stereo components.