Howdy and WELCOME to the Forum!
Yes, the timing is best set near top dead center, and then you can adjust it advance or retard just a few degrees from there to find where it runs best for you and whatever fuel you choose to use. I think the Hall Effect will work regardless of actual gap, but you don't want to be rubbing the plastic housing with the timing disc, so spacing it as far away toward the flywheel as possible is what I do with mine, and that seems to work fine. Setscrew for the timing disc is undoubtedly some small metric size like M3 - 0.5 x 3.0mm long, which I think is correct, and most any decent hardware store should stock them, and possibly hobby shops as well.
Your method of watching for the spark is probably the best to use as it is hard to judge just when the Hall Effect sensor trips otherwise. A deep 8mm socket (or 5/16ths also works) makes a good spark plug wrench for these. I would not bother trying to adjust the sensor itself, as it is much easier to just adjust the disc that carries the magnet.
Hope any of this helps, but if it doesn't, get on here and ask again and no doubt someone else will pick up your questions and perhaps do a better job of answering them.
Good luck with this and be sure to let us know how you make out.
Got my hit and miss horizontal engine and the little wheel that has the magnet in for timing spins around because the set screw fell off somewhere and the small wheel now just spins around when trying to start, it is not tighten in.
1) How do you set the timing?
2) Where do I find this tiny set screw?
I'm a newbie , if this was a old Chevy, ford, Chrysler I would not have a problem setting top dead center.
Do I set it by taking the plug out, let it fire and then set that hall effect wheel with the sensor that is screwed on the body of the engine? Look like there is lean were there to because that hall effect has a small amount of adjustment to. Also is there gap between the 2 that has to be set?
Thanks.................