This is what I do. Feel the tap, slowly crank on 'em and load up the rod (supposedly this is when they are climbing on the bait), then once the rod is loaded set the hook.

I have found that halibut will hold on to a plastic for quite a long time and in some cases the more you pull against it the tighter they hang on. Also, if they drop it slowly work it in the area and/or recast to the same spot as they will most likely pick it up again if they see it/find it.

I wouldn't worry too much about downsizing. I got most of my fish last weekend on a 6 inch Fishtrap. Downsize because you want to try something different or because they're not hitting what you have but I'm too sure I would downsize because you're missing strikes. Not at first anyway. A 5" inch bait is definetely not too big in most circumstances.

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You can't catch tomorrow what you kill today - please practice catch and release.