Sim toolchange-with-length-switch basic questions?

I have been poking around this SIM, and forum and Doc posts about it, but can't seem to wrap my head around the "Reference tool" button and what it means operationally.

Is that designating a tool as a known reference? So you would have to make a tool with a known extension and use it as say Tool 1, so the rest of the tools know whether to add or subtract from that tool length when they measure? Does it have to be a known extension or just some random tool to start the ball rolling?

If I know the distance between my button and the intended "Zero" can't I just manually hard code it? (IE... my button contacts at -14.3500" Z from "Home" and the bottom of my vise is at -13.2500" in machine cords, so I could contact the button and just tell it to set Z at the point of contact to +1.1" to be at my reference, the bottom of the vise.)

I guess I'm just not sure if I am designating a tool as a reference, creating a reference point for the machine or adding a reference to the tool table for a tool when I select that button.

Ohhh, bonus question.... is this the right "Method" of doing a manual tool change and automatically re-measuring the Z offset for each non-indexed tool as you go? I ran in to a few methods in the forum and this appears to be the latest, but I wasn't sure.

Thanks all!

Thank you for the quick answer! So, the first tool in sets the starting point? The tools aren't indexed in any way (collets) so the first tool could be anywhere (in Z) in relation to the spindle.
Do I need a static tool to make it work? I could index the spindle, but it is a "hole" when not populated. Hmm, I will try and see if I can offset the testing position to the "rim" on the spindle for the reference position, then back to center on the subsequent probes.

I just realized I have a couple of "R8 emergency collets" that I picked up because they were $3 on clearance. They have a 1/8 pilot hole, and pins in the relief cuts so they won't "spring" when being worked. I bet that would index pretty accurately and give me a reference point.