Transducer under the ice
I also usually drill a separate locator hole, but with this method you really don't need to because it's not really in the way.
As the one gent mentioned, 'The transducer needs to be hanging straight.'
Like another gent mentioned, I always drill a separate hole for the Flasher. It eliminates the tangles with the line.
It's kinda funny, you'll see and hear pro staff guys representing each of the different companies who make flashers using them both ways. My thought is that older flashers required you to hang the transducer lower because they were not as technologically advanced as newer ones are and they'd be more prone to false readings from ice. 20 years ago or so it was stressed that you hang it right at the bottom of the ice or below. Now this isn't stressed as much. Since "hanging it below the ice" became so ingrained in our minds it became a habit that's hard to break. The only way you'll know for sure is if you experiment with it and find out what is comfortable for you.
Even with the bottom of the ice hole or just a few inches up from the bottom is just fine.
The only time I let it dangle is when fishing in say 19'-21',or 38' to 41'. I drop it to keep on the 20' or 40' scale...and still see a decently-wide bottom signal. Sometimes changes in the bottom signal can show a fish approaching right on bottom.
If the ice is good and clear (and wet) I often fish with the transducer on the SURFACE,not down the hole. Also,if I'm planning on fishing a spot for a while I drill a separate hole for the 'ducer so's not to tangle the cord with the line when a fish is on.
With thick ice you'll get interference with the 'ducer hanging just below the surface - especially if the ice is not clear.