Are type 2 torpedos supposed to have variable speed settings?
 

For some reason, I can change my torpedo speed with Type 1s (the steam, bubbly kind) but i am stuck on "slow" with type 2s (the electric wakeless kind).

I have GWX gold and some other mods.

Type Is were gas powered and had variable speed setting, type II on up were battery powered and had a fixed speed setting.
All type Is, even the later models of pattern running torpedos, could be set for slow-med-fast, while the type IIs cannot.
It's not a bug, its a design feature...

In addition, I have read that use of the fast setting on T1's was discouraged or even forbidden as the engine could be damaged, leading to torpedo failure.

KH

I don't know about that, but if you don't know the exact course or speed of the boat you're pursuing, get as close as you can and set your torpedoes to fast.