Yes, the blue wire carries the charging current unless/until the blue knob is turned to connect the main ground.
Chris, yep, you are.
This terminal is normally open. The connecton is made by tightening the blue knob when the battery is required. Look at the circuit diagram.
A normal diode can be used but these have a voltage drop of about 0.6 - 0.7volts. This will ensure the battery is not fully charged. The schottky type has a drop of about 0.4v so the battery charge will be pretty well complete, depending on the voltage regulator output.
There was a time when schottky diodes with a high current capability were not available. I've used ordinary diodes with complete success.
Gav, the problem you describe is simply because the engine is not able to produce enough power to spin the alternator at tickover. A well designed modern engine should be able to cope with the extra load. I have seen a situation where a slightly slack alternator belt slips when charging a flat battery but is ok when the battery is charged. Also, this system is supposed to prevent you ever having 2 flat batteries!
Edit.. forgot to say. The thinner black wire is, indeed, the negative for the unswitched supply.