When there is a problem initializing DanceForce, the output of the error appears in the widow on the right side of the settings dialog in the AVS control panel. If DanceForce believes that Direct Input has been initialized OK and everything SHOULD be working, nothing is displayed in that window. At the bottom of the settings dialog you should see a status message, "Don't have a good beat" or "We have a beat". When the beat has become stable, you should see the dance counter counting off "one..two..three..four". If you see all this and your joystick isn't dancing, try increasing the force-feedback amount in the control panel for the joystick. You must do this yourself because as far as I can tell you can't change this setting in a program (that's probably for the best anyways). If you are getting some kind of error output in the window to the right, please mail it to email@example.com.
The beat detection is based off of the AVS Beat detection. DanceForce will only dance when the beat appears to be stable (so not at that first part in the song when the bpm changes wildly) This is because DanceForce does not want to look like a dork thrashing around. When the song is going well and the beat is clear, the joystick will dance well, it predicts the point when the next beat occurs and applies just enough force to make it to that position on the beat. When the beat detection sends down a few strange beats, the joystick usually will stop in place to the right/left.
While testing with a Logitech Wingman Force 3D I noticed that if the force setting was set to 150% (apparently with the Logitech drivers you can do that) the joystick tended to thrash rather violently (it was pretty funny to watch). So, don't do that, unless that is the desired effect.
Basically you should delete the DanceForceEnabled directory. The reasons are that as long as that directory is underneath the \plugins\avs\ directory, winamp can select a random preset from in there (and thus kick of the force-feedbackness). Since none of those presets are special and they can be automatically recreated by AVSConvert, you don't need them around.