it should sit 4 fingers' width above the top of the nostril... i.e. you can get your flat hand between the nostril and the bottom of the drop noseband. that's the most important thing, it mustn't be any lower.
then the tightness is up to you... because of the angle at which it sits, it doesn't need to be tight to work (unlike Grackle and Flash), so one or two fingers in (as you would for a cavesson, comfily fitted) should be fine.
it drives me crackers seeing them fitted too low, affecting the horse's breathing!
umm, i've never used one with a gag, but i don't see why not. don't do it too tight to begin with, see how the horse reacts. a friend can tell you if he's opening his mouth to evade, and if so, maybe tighten it a little.
obv make sure teeth are fine first!