midi configuration is like the pipes that send the water, you have to configure those with the correct channels or there won’t be any talking going on. Midi source is so that the water isn’t always on, you can select on a per pattern basis where you want that track’s midi to point at. Auto channel is so that the controller portion will talk to whichever channel is currently selected (active), it takes some of the specificity out of routing where control is concerned but you can use a specific channel instead of auto channel depending on your intentions.
Tchu’s info is more detailed, I’m just trying to simplify the concept so you have the very basic foundation and you can build understanding on top of that.