First download and unpack the archive containing Squish's code. Alternatively, you may clone the repository. The change into the directory containing the squish.lua file. You will also need a Lua 5.1 executable (which I'll assume is called lua51.exe in the commands below).
The Unix Makefile in the archive contains roughly the following commands (translated to Windows) to build the squish tool:
bootstrap squish tool (without gzip compression or debug support for now)
lua51.exe squish.lua -q --with-minify --with-uglify --with-compile --with-virtual-io
prepare gzip compression modules
lua51.exe squish -q gzip
prepare debug support
lua51.exe squish -q debug
build final tool (with gzip compression and debug support)
lua51.exe squish -q --with-minify --with-uglify --with-compile --with-virtual-io --with-gzip --with-debug
The result is a Lua script squish (without the .lua extension) in the current directory. To use it you have to write a squishy file for your project and execute a command line similar to the last one above in the directory containing your squishy file.