Ok,
I like what Lohring said however, beware that this method is NOT recommended for newbies.
I would recommend getting the needle to where he described and then toss the boat into the water as this is the REAL test.
The speed should be slow with no power but the engine should continue to run. Bring the boat in and lean it down. No more than 1/4 turn at a time. As the rpm's come up, your adjustments become more critical.
Once you feel the boat is running 30-35 mph, adjust your needle in only 1/16-1/8 turn increments. As you get close to optimum, you will notice a speed and power increase. A good test to determine if your needle is right is that you toss the boat and it runs through your entire tank of fuel without dieing. My experience, thanks to a very noteworthy and long-time tunnel racer, is that the K&B "ss" engines will lean-out after they heat-up and if it leans too far past optimum, it will quit.
Keep in mind, that when in the "racing zone" of an R/C engine, your needle setting is critical and going too lean could ruin your day. Some people I know add castor oil to their fuel because they do run "just-on-the-edge" of disaster.
Hope this helps,
Snowdog