Yes you can read codes on the 300e 2.8
you should use the homemade tool as follows:

connect the black wire to pin 1 (ground)
connect the red wire to pin 16 (+12 V)
connect the 3rd lead to any of the other diganostic pins (3, 6, 8, 14...)
--It appears that you've done this correctly since the LED is on

To read codes: (With the ignition ON but engine off - all the gauge lights will be on)
1. press and hold the switch for 2 - 3 seconds
2. release switch and count the number of blinks of the LED
--this number is the code
3. repeat until you get the first code again (it cycles through in numerical order)

To reset codes:
1. read the code as above
2. hold the switch down for 8 - 10 seconds

each code must be read and cleared individually

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Daily Driver: 02 E430 4MATIC
In the family: '03 E500 // '04 ML500 // 64 220SE