I'm with VO2 on this one as this is the technique that I've used. Its good to ask others for comments on your saddle height as they will be able to identify any problems with it. If your hips roll as you pedal your saddle to too high and if your legs are too bent then its too low.
Remember that some cyclists pedal toe down/up and others with their feet level. There are examples from the pros of all types of pedaling technique, all you need to do is to remember to adjust your saddle height to compensate for your pedalling technique.
Generally, pedalling with level feet is best and extremes of toe up/down can cause problems with your knees, legs or back. To correct a poor technique you'll need to do training specificaly geared to improving pedalling technique.