If there was one word with which to describe Milotic, that word would be "resilient." Thanks to Recover, Marvel Scale, and great defenses, Milotic is not easily taken down. With investment in Defense, many of the game's best attackers will fail to bring it down. As a bonus, Hypnosis lets it shut down whatever the opponent brings in to try to stop Milotic. In short, Milotic is a great bulky Water-type.
This is Milotic's classic defensive set. While Milotic is less bulky than the other bulky Water-types in the tier, Recover separates Milotic from the others and lets it stick around far longer to counter multiple offensive threats. However, because of its lesser bulk, you'll need to invest fully in HP and Defense in order to switch in safely to Choice Band Salamence at full health.
Surf is Milotic's main attack, as Milotic's base 100 Special Attack can actually damage the foes it's switching in on. Ice Beam makes Milotic a sure answer to Salamence and Flygon; it also threatens Celebi on the switch, forcing it to Recover. Hypnosis puts a halt to some of Milotic's switch-ins, while Toxic keeps Blissey in check and can help wear down Celebi, opposing Milotic, and defensive threats in general.
This set makes Milotic very difficult to take down. Rest lets it take advantage of Marvel Scale, Surf provides STAB, and Toxic lets Milotic stall out opponents that have no way of recovering from status afflictions and can take down offensive Pokemon while Milotic loops Rest. Ice Beam is a solid choice to immediately threaten Salamence rather than trying to wear it down with Toxic.
Once again, Milotic should focus on its physical bulk as opposed to its Special Defense in order to better sponge attacks from Metagross, Salamence, and Aerodactyl. With Rest and max Defense, you can begin looping attacks from these and other Pokemon before whittling down their HP with Surf, Ice Beam, or Toxic.
Hidden Power Electric can nab a 2HKO on Gyarados, but that is essentially all it's good for. Light Screen can be used for team support and keep Milotic safer from Electric-type attacks. Refresh is a cute toy to keep Milotic safe from Toxic, which severely hinders it. Finally, Mirror Coat is effective thanks to Milotic's great HP and Special Defense.
Checks and Counters
Celebi is Milotic's best counter. Leech Seed and heavy bulk makes it impossible for Milotic to take it down. At best, it can go for a status infliction, which Celebi just switches out of thanks to Natural Cure. Most Electric-types can stop Milotic easily with STAB Thunderbolt, but Raikou and Jolteon can't take Surf repeatedly and don't appreciate being hit by status, while Zapdos can only take so many Ice Beams. All of these Pokemon should watch out for Mirror Coat, however, as they will never OHKO Milotic without a Special Attack boost.
Pokemon that don't take much damage from Surf and Ice Beam, such as Regice, also match up well against Milotic. Blissey can't do much to Milotic because of Recover, but it has no problem sponging Milotic's attacks. Starmie is a great counter because it can sop up status with Natural Cure, while a resisted Surf or Ice Beam does next to nothing to Starmie. However, Starmie will need Thunderbolt to do relevant damage of its own. Note that Natural Cure will not be of much help against Hypnosis Milotic, as it will cure Starmie of sleep and deactivate Sleep Clause when Starmie switches out; all it will do is waste Hypnosis's PP or give one of Milotic's teammates a free switch.
Keep in mind the threat of Hypnosis; if Sleep Clause has not been activated, any counter risks being put to sleep. Therefore, Sleep Talk Heracross is another good choice thanks to its surprisingly high Special Defense. With a Choice Band or a Guts boost, Megahorn 2HKOes Milotic. However, once Milotic lulls a Pokemon to sleep, a handful of Pokemon can use Milotic as setup bait. Curse Snorlax, Calm Mind Suicune, Calm Mind Wish Jirachi, and Dragon Dance Gyarados are all such Pokemon.