The top of the front post should be in the center of the rear circle.  While maintaining that alignment, the tip of the front post should be placed on the center of the target.

(Due to the black color of the "target" in the picture on the right, it looks like the front sight is taller.  It isn't; note the top half of the white aiming circle that represents the center of the target.)

-Troy

You should NEVER try to sight in with the front sight at the bottom of the rear circle; you can't see the front post properly.  But some people do, and (incorrectly) refer to this practice as a "6-o'clock hold".

Handgunners who shoot fixed-distance, standardized-target competitions will sometimes sight their guns in so that they hold the sights at the bottom (i.e., 6-o'clock) of the black circle at the center of the target.  And while this can be helpful when you KNOW that the target circle will be exactly the same size and the exact same length away from you, you should NOT sight in a "general purpose" gun that way.  Because bad guys don't wear black circles on their chests and stand 25 yards away from you.

-Troy

I have my AR sighted in for a 6 oclock hold for service rifle competition. When your prone at 500 meters a target that is 21 inches wide is almost impossible to see. A 4 foot target backstop is the same width as my front sight post. So I line the edges of the frame up with the edge of the front sight post and leave just a little white between the black dot which is the target and my front sight.
Troy is right though. For a general purpose/home defense weapon sight it in to hit point of aim.