The timing is adjusted by physically rotating the body of the injection pump either to the passenger side (retard) or to the driver side (advance).
The "good old boy" method relies on the relationship between the two timing marks on the front cover and the pump body itself. Some people say that about 1mm equals 2 degrees of advance. I say that our diesels are so sensitive to cylinder pressures that guessing at a precise timing figure isn't wise.
There are a few different meters available from Snap-On, Ford Rotunda, and a few others. The most accurate method is to use a luminosity timing meter such as the Snap-On MT480 or the digital MT1480. A sensor threads into the #3 glowplug hole and actually views the combustion event. A magnetic probe detects an indentation on the harmonic balancer. The two are compared and a timing result is achieved.
With the timing marks perfectly aligned, and assuming that there is no slack in the timing chain, TDC should be at 1400 RPM. Leave it there for moderate power, and low NOx levels. Advance the timing to about 3-5* BTDC anywhere from 1300-1500 for more power. Several factors influence which timing mark is best for you. Is your engine: Turbo-ed? Non-turbo? What's the fuel rate? What's the injector pressure? How much timing chain slack is there? (you really should be running DSG gears anyway!)
I've got a full writeup about halfway finished that covers what timing does to engine performance, efficiency, and emissions, and gives a practical tuning application using the MT480 on my truck.
I know that's a lot, but this really is a cornerstone in maximizing engine performance.
