I have a Lionel Dwarf Ground Signal on my O27 door layout, protecting a switch on the reversing loop.
The common return just goes to the nearest dropper, and the hot wires are connected to the respective sides of the loop, which has isolated sections powered by the switch - so when the switch faces the main line, it shows green, and when it faces the loop, red.
To actuate the signal from the trains, you need an isolator Rail. Then you wire the HOT side in common, and ground it through the isolator Rail, and whichever bulb has a complete circuit at the time, is lit. Note that the isolator rails need to be far enough apart, that only one bulb circuit is complete at any given time, or more than one bulb will show. OR, you can wire it in conjunction with your isolated blocks, and it will show which blocks are live.
