My temp gage started normal, driving down the road I notice it is moving back and forth. It never gets above a normal level for it but it dips below the warm line and then back up fairly fast. I push in the clutch and it goes back below the line. I go and get temp sensor and put it in, it is two prong and is put into the line going to the heater. They also gave me a TU25 temp switch, but I cannot find where to install it!

First, am I on the right track?
Second, were does this switch go?