This is my most popular plugin. Flowplayer HTML5 for WordPress
I did try to think through my documentation etc. All of the documentation should be in the readme.txt. It is the best place as that added to WordPress.org for easy access. You can use this link to validate your readme.
Not all plugins do need any documentation so it is not a must but can make it easier for users.
Another way of doing to it adding a link to your site in the readme where you have the documentation. Polylang does it this way.
You can update the readme.txt without needing to change the plugin version so it is no more difficult to update the documentation in the readme then it is on your site.
Here is also the the WordPress.org guidelines.