use Octamed 4 channel mods of course, but Soundtracker is generally preferred because the playroutine is more lightweight. Octamed has a lot of features that are great for the musician, but involve more CPU overhead. See here for various reasons why: http://amigasoftware.wikidot.com/octamed
By Soundtracker derivative I mean things like Protracker, Noisetracker etc, where the module format is almost exactly the same and often mutually compatible (Sountracker mods will load straight into Protracker without any conversion). Octamed is based on the same concepts but the file format is different to allow more features.
All four channels can be used in game music, as long as you don't mind one channel dropping out when a sound effect plays. Mr Beanbag uses the bass channel to do sound effects, and you don't notice it too much when playing.