 It's better just to set the nail head flush and then you just smear a little bit of caulking over the top of it to seal it so that when you go back over that with your acrylic paints, the nail heads don't rust and show through as a spot on the trim. As far as the length of the nail, is this going on top of your siding or has the siding been cut back to allow this to sit against the sub sheathing?