I liked a good 5-6 inches, but that was just my preference. I wanted it to be soft enough so they were comfortable when laying down.
I used a combination of shavings and pellets. I would put the pellets down whole/unwetted where they would urinate, then cover with regular shavings. The urine would go through most of the shavings and was absorbed by the pellets, which kind of worked like clumping kitty litter. This worked great in my one gelding's stall as he was a neat freak and only urinated in one spot.