I also have a heater like this, and according to the instructions you do pretty much exactly what deli said.
Put it in the water, let it sit for a few minutes. If your temperature is below what you want it to be (which it should be) SLOWLY turn the dial higher, until just as the light comes on. And within an hour or less, it should turn off. Now check the temp. If it's high enough once the light is off, leave it. If it's still too low, turn the knob just until the light comes on, leave it until the light is off, and then check again. Once you have it set you should be good.
Now I have a question of my own. Does anyone have any tips on keeping a tank cool? My friend has a 20 gallon tank setup in a dorm room, and even though they have air conditioning, it doesn't work very well. The heater normally keeps the tank in the 76 degree range, but now with warmer temps, even with all windows open the tank is usually at 80-82 during the day. Is there anything that can be done other than just replacing some water with a little bit cooler water? Thanks, and sorry to hi-jack your thread but it seemed related.