Yes, any direct drive wheel will work fine in LFS. There aren't many options to configure in LFS, except for overall ffb strength of about 20% (depending on the car and track), ffb rate which should be set at 100Hz and ffb resolution set to 10k. The rest you can play with in the driver settings of a particular wheel if you need to fine-tune the final torque and other stuff to your liking.
Yes, direct-drive (DD) wheels are very good. Comparison between G29 and DD is like comparing small plastic PC speakers with a high-end Hi-Fi speaker with 3 drivers. The AC servo motor of 1kW can reproduce pretty much everything from an ffb signal, down to the tiniest detail, so you can feel everything LFS has to offer. Because ffb signal is not really a true replica of forces that come through a steering wheel of a race car, there is a big freedom in what needs to be felt there and every sim developer has implemented their idea of, call it an ffb flavor. In my opinion, LFS has the best ffb in that sense, it gives you exactly what you need in order to understand how the car behaves and it also gives some sense of G-forces, that would normally come through the car seat in real life, but without too much high-frequency road noise and other unnecessary and distracting vibrations.
You are correct about clipping, in LFS ffb strength should be set to give a max signal with little to no clipping, independent of a wheel. This depends very much on your driving style car and track. Then the desired ffb strength you can set with wheel settings in driver. Think of LFS ffb strength setting as a volume slider for an audio card in Windows. You always want this to max available but without any clipping or distortion, it just so happens that for most sound cards in Windows this is at 100%, while it LFS Scawen chose that this is around 20% or so. It's just about scaling, maybe he will make this number different when we have new tire physics, but for now, the sweet spot is 10-20%. After that, you adjust the volume of your music to your liking in the settings of your audio amplifier - the wheel itself.
If you are thinking of buying a DD wheel, consider the following.
They are all very good and very much good value for the money. Think about how much you will be using it and if you actually have that much free time to spend on it. Also, due to increased available torque, you may want to upgrade to a better desk or even a cockpit with a seat, and at that point, things can go sky-high with the price if one gets too carried away. It's an addiction, so big caution there it can easily seriously endanger friendships, relationships, or marriages.
Thanks for all the help, just one last thing, I want a DD wheel obviously but I don't know what kind of ffb level I want, obviously I do not want clipping but I dont know how to set it up and make sure there is no clipping as I have no idea what it feels like.
Normally, anything with 8-10Nm max holding torque is more than enough. This is not to say that you will max it out, you will probably use 20-30% of that torque in real racing conditions, but it is good to leave some headroom for high torque spikes that will not be clipped. Don't worry about setting it up, you will manage as there are plenty of resources for any DD online.