There's a few quirks with shadow cloak and its morphs that you should understand if you want to use it effectively.
1. First up, it isnt just DoT effects on -you- (applied by enemies) that will cause you to lose the cloak. DoT effects that you put on enemies will also break the cloak when they tick, because the game thinks you're making an active attack against the enemy (damaging them), and the cloak is broken on any attack.
2. It only lasts 2 to 2.5 seconds, 2.9 with passives in the shadow tree. That's hardly enough time for a fully charged heavy attack, so it may seem like you're getting knocked out when really the duration is just up already. This is especially noticable when there's any kind of lag going on. There's also a psuedo-global-cooldown on all abilities in the game (a very brief period of time after using an ability that prevents you from using other abilities, also effected greatly by latency), so you dont even really get the full 2-2.9 seconds out of the cloak before it drops.
3. A lot of enemies seem to be able to see through the cloak anyways. This has changed from PC launch, where nightblades could literally solo dungeon bosses with nothing but dark cloak and resto staff attacks because they were constantly invisible and couldnt be detected. Now it seems like any moderately strong enemy can see through the cloak and ignores it completely, and it also costs a lot more magicka now than it used to.
4. There's only three real uses for cloak at the moment: the first is with the shadowy disguise morph, which boosts the critical chance of your next ability by 100% when shadow cloak is active. Using this in combination with either a high damage attack, or any ability and the passive assassination ability that boosts your group's critical rating whenever you get a critical strike, makes for a good damage or support combo. This works well with surprise attack, too, since it can stun the target.
The second is with dark cloak, which removes damage over time effects from yourself. This, IMO, is less useful since damage over time effects are often not powerful enough to even worry about in this game. It can be useful when going up against werewolves, dragonknights, or bow users, however.
The third and final use is with the shadow barrier passive, which gives you a fairly good boost to armor and spell resistance whenever using a shadow ability, turning the cloak into more of a defensive buff.
A lot of nightblades end up giving up on shadow cloak just because it's arguably the buggiest, most situational ability in the game. It doesnt serve a lot of use in pvp, and in pve it's very unreliable.
NP, actually I forgot to mention that when you're trying to sneak through a dungeon or any cramped area with a lot of enemies, you can 'spam' shadow cloak to remain undetected even while you walk right in front of enemies.
They supposedly fixed the player's own DoTs breaking the cloak, but in my experience nothing has really changed. Any time I'm using my bow on my nightblade, and I hit someone with venom arrow and try to use shadowy disguise, it breaks immediately.