The lights should come on at the same moment the gates drop down. The lights should alternate/flash as well. Sounds like you'll have to send it to Lionel for service if the lights aren't coming on.
I have my isolated section spread about 1-1/2 track sections in either direction. I made my own isolated section (on curved track due to the approach) with a Dremel tool, cutting the rail to create a circuit break. Works nice, so that when the train approaches the gates drop for 3 seconds before the train makes the crossing and the gates raise 2-3 seconds after the caboose or last car passes. Of course, timing depend on how fast you are running the train.
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