Amazon Affiliate Question

I want to set up a website selling products off amazon.

In this example, I will use My little Pony.

I set up my-little-pony-toys (dotcom)

I sell only my little pony toys on the website.

Is this allowed to have that domain?

Are there any other terms and conditions I should know.

Yes, you can have that domain with no problems.
You should their Policy present on all the pages of your website ( best to have it in footer)

If "my little pony" is a registered trademark you might have problems.

Super safe people go for generic domains. Like "littletoysforgirls.com"

I knew it was good

It's best to avoid the trademarked terms if at all possible. I've had a couple taken down over the last few years. If you use the more generic terms, you can build a large authority site and cover a larger audience. Or you could just go for a more niche specific generic term like "little-ponies-for-girls. com" or something along those lines. Either way works, just steer clear of the trademarks and all should be well.