Warning: There will be spoilers in this guide, so don't read it if you haven't beaten the game once yet and are concerned with spoilers!
Paladin difficulty is unlocked once you beat the game on any difficulty. You can switch the difficulty at any time, but credit is given for beating it on a given difficulty only if it is set to that difficulty for the entire time in a level. In other words, you can't just change it to Paladin right before finishing a level.
Paladin is much more manageable if you collect all upgrades. You will then be able to carry 30 daggers, 10 holy water, and 10 fairies. You will also have full life/light/shadow bars. Fortunately, enemies do not get more health on higher difficulties, but it's very possible to be killed in 2 hits even with a full health bar.
The easiest way to get through on Paladin is to use the Ultimate Light and Ultimate Shadow relic powers. They cost 25k experience each but are incredibly powerful.
Ultimate Light makes you invincible, and you will do 100 damage rapidly to any enemies caught in the radius. As well, you will absorb health at an incredible rate, easily healing from near dead to full using less than half of the magic bar. Ultimate Shadow does 250 damage a shot and knocks down almost every enemy in the game, and can be spammed while they can't get up.
With these two abilities, bosses like Pan, Cornell and Satan become incredibly easy. As long as you have full magic, you can slam enemies with Ultimate Shadow, and on the off chance you get it, heal up quickly with Ultimate Light. Any time you pass a magic fountain, make sure to completely overfill so you can unload the abilities in the next sections.
If you run out of magic and can't refill easily, always remember that a perfect block followed up with counter attacks will completely fill your Focus gauge. After that, some quick strikes will usually give you enough orbs to at least get out Ultimate Light to heal yourself up.