Diode characteristic measurement - initial tester settings
Your instructor is having you maximize the current limit because there is a resistor in series with the diode, which limits the diode current, even if the supply voltage is turned up to its maximum (assuming the professor has checked that the maximum for the supplies he provided are appropriate). 

If the current limit were turned lower, some students would invariably end up reaching the current limit without noticing, which would lead to invalid experimental results. By choosing a power supply with a reasonable voltage limit and an appropriate current-limiting resistor in the circuit, the professor avoids confusing students with these details.


  Can you tell me how the current limiter actually work? Is it just by adding some resistance?


Assuming you're using the circuit on the left, 1N4001 is rated for 1 A. And the maximum applied voltage is 10 V. Then the maximum current that will flow through the diode is approximately

$$\frac{10\ {\rm V} - 0.7\ {\rm V}}{100\ \Omega} = 9.3\ {\rm mA}$$

which is well less than 1 A.