That was me last night in Westhill with you (NightHawk, see in the signature). You may want to try driving with the mouse rather than the joystick like you said you were using. I think you may get a bit better steering control using the mouse. I don't know how you were throttling and braking using the joystick, but the biggest downfall to using mouse is having strickly an on/off throttle and brake.
There is alot more mouse/keyboard drivers out there than joystick drivers. You may get some good help with setup if you switched to mouse. Of course, ideally, you'd want a wheel. A wheel gives you very precise control of steering and pedals (obviously) and makes it much easier to "race" with others.
Track awareness, or racecraft as others call it, is very important when you start to get involved with closer racing. This is knowing where your opponent is at all times without needing to hunt for him when he moves out of your view. Gaining experience and track layout knowledge is the key so that you can look away from the track left/right without loosing your focus of driving your racing line. It all comes down to knowing the tracks real well and experience.
Sorry I couldn't help ya out any more than I did last night. I never drive that car, and I have no idea on how to setup for joystick driving. I pulled out in the FXR those few times, but being an FZR fan, I was clueless on how to fix up the setup to help you out, LOL. Out of almost 6000 laps in LFS, I think I have only 10-15 of those in the FXR.