The right pressure is the one that works the best for you with your airbrush and paint. Some airbrushes need more than others. Bottom fed airbrushes generally need a little more than the gravity fed type. External mix airbrushes usually need more than internal mix. Thicker paint needs more to spray well. Detail work is usually easier with lower pressure than needed for general coverage. It doesn't matter what the gauge says if you adjust pressure to get the output you want. It could range from 8 to 40psi. Once you determine the sweet spot for you, the gauge makes a handy reference, whether you set it with trigger up or trigger down. For my Badger 155 with a 1/4oz. cup and paint thinned the way I like it, somewhere around 15psi works for me.
There is only one o-ring in the VL, and that's in the air valve. If it's the old style, it's part number A52. The new style air valve gets part number A53. Have a look at thisdiagram. There is a packing nut, but that's not likely to be your problem.
If you can spray OK with the #1 nozzle, but not the larger sizes, I think your compressor is tired. The seals do wear out.
A little air leak at airbrush joints is normal. It can usually be stopped with a little bees wax or Chapstick on the threads.
My guess is the dirty needles are a large part of your problem. Wet sanding is a last resort. Try cleaning them with lacquer thinner or acetone. Judging by the needles, the nozzles are also probably filthy. Soak them in acetone or lacquer thinner and swab with cotton on a whittled down toothpick. Hold them up to a light and look in the large end. You should see nothing but shiny metal. Match the nozzle to the head by comparing the size of the openings. Number 1 is the smallest and 5 the largest. Check the needles for burrs on the end and the nozzles for tiny cracks.
Don't let solvent get in the air valve. If you are getting air all the time, the air valve may be stuck open or the tiny o-ring inside damaged. If you take it apart, be careful not to lose the tiny components.