You should start the Shivering Isles DLC in Oblivion around level 20. While you can technically begin the DLC anytime, waiting until about level 20 is optimal because the loot and equipment available will be best suited for a higher-level character. Starting earlier may result in some unique weapons and armor becoming outclassed quickly by base game gear. The DLC also offers a challenging experience that is better enjoyed with a more developed character. If you start around level 20, you will get the best balance of story and gameplay benefits while still having plenty to do in the base game.

The DLC can be accessed by finding the Strange Door in Niben Bay, where you enter the realm of Sheogorath, the Daedric Prince of Madness. You do not need to finish the base game's main quest to start it; it can be started at almost any time after the game has progressed enough to find the door.