Hey Michelle, I put mine flange-side down (the wide part that slides into the racks). Fill your drip pan FULL of ice, and set it directly on the plate. Also, it needs to be on the lowest shelf rack.
Wood to avoid? That's up to you - you'll learn by trial and error! For example, the first time I smoked cheese, I used apple...it was awful! Apple wood smoke tastes much differently in cheese than it does in meat (imo). I'm actually more of a fan of hickory or cherry.
My cheese tastes are pretty simple, too - any cheddar, mozzarella, provolone, Swiss, jack pretty much. I'm not a big Gouda fan, but lots of folks are. Again - all about YOUR tastes! Pick your favorite cheeses - they're only better smoked!