It does have to be a feltable yarn- like 100% wool, that does NOT say "superwash" or "washable". There's tons of 100% wool out there, I know Lion Brand makes a few, if you are stuck with a Hobby lobby/Michael's type place.
Felting is fun- like magic. the bag pre-felting will look a little out of proportion and floppy, but should turn out just fine.
I've never made that pattern, and I'm not sure why they say to cast on using straight needles. it may be a typo. if it is all worked back and forth and not joined, it probably doesn't matter.
I always get the beginning of chart reading mixed up: You start from the bottom, but I get the l-r and r-l mixed up inless it is infront of me. I'm sure someone can straighten you out!