Right now I'm looking at various sheet music and I want to know how do you figure out which position to play in is it based off of the key the song is in or is about which position is easiest play the song in
You should look at the range of the passage you are about to play.

For example, If the range is an octave from E4 to E5 then it would be wiser to start on the 9th fret of the 3rd string and move up to the 12th fret of the 1st string than it would be to try to go from the open 1st string all the way to the 12th fret.

There may be more options but to be honest you should use common sense. Whichever position sounds and feels the most effortless to you.
It also depends on if you're playing by yourself, or with a band. If you're playing by yourself, you can get away with playing anywhere on the neck. If you're playing with a band, you might want to consider playing to avoid having your notes buried by another instrument. Playing low notes with a bass player or pianist in the group may result in those notes being covered up. When I'm playing with my group, I try to avoid lower notes when the bass player is doing his thing. If I'm playing a solo introduction to a piece, then I play anywhere on the neck I want to.
Ermm...KG6...are you sure you're talking about sheet music? Because, as far as I know...the low notes (meaning those that are below the staff) are mostly on the 5th/6th string. Also, if you are given a sheet music score, you can't look at it and go, "Oh, that's an E2 note. I'm going to play an E4 note instead, so I can be heard better over the band". Maybe I'm not understanding you, though...

The fingering/position is mostly up to you. As danny said, it helps to look at the range of the passage. However, guitar typically has several spots where notes fit the same range. Since no guitar player is the same (for instance, some of us have shorter fingers, and some have pro basketball player fingers)...it's best to find a spot that covers all the notes to be played and that is comfortable for you.
General rule of thumb is that you shouldn't need to stretch too far or do too many weird movements. You want your movement from one note to the next to be as smooth and fluid as possible. So, as an example, if you're stretching from the 10th fret to the 14th fret (and find it uncomfortable), then maybe you should finger the note on the 14th fret in a different spot.

Make sense?
range, direction, timbre, and need for specific techniques.

range - place the hand where you can hit all the notes in a phrase without moving it

direction - place the hand where it requires the least movement up/down for the next position change

timbre - consider whether you need to use a particular string or strings for continuity of timbre. If you have to use the E and B strings for an ascending passage, you'll probably have to change position multiple times

specific techniques - use the position where you can apply the techniques you need. You cannot slide or hammer/pull from one string to another.

If you are sight reading, focus on range and direction. If you're learning a piece of music, consider all of those equally. Whenever possible, take your time and find the positions that produce the best sound.

There are also lots of sight reading books out there organized by position for the very purpose of helping you get familiar with this concept.

For improvising, work on getting familiar with keys/scales all up and down the neck, and practice them both in individual positions and ascending/descending on individual strings. Learning 4 note per strings scales is also a really good way to change positions seamlessly, as you'll be changing position for every string.
Last edited by cdgraves at Mar 23, 2014,