The signals use a basic NORAC signal rulebook standard.
JR has also broken down their signals into a simple code, which works well when planning which signals to place where.
Type 01 and Type 04 are Absolute signals.
An Absolute signal is used where a siding or side branch meets a mainline, and be considered a stop sign. Our own traffic signals are supposed to work like absolute signals, but most drivers think of them as permissive signals.
Type 05 are Permissive Signals. These are defined as permissive due to the small name board placed below the signal head. For AI drivers, it's a script, but in real life an engineer will call out the signal to the dispatcher and ask permission to pass should the signal aspect be anything but green or yellow. Yes, there can be red Type 05s, but they are not indicating stops, just the signal ahead is red.
These signals are used in conjunction with the Type 04 signals, and are used in between them. They allow trains to follow each other as they indicate the signal ahead.
With a Type 05 being permissive, the AI will pass by them at the indicated speed. A yellow-flashing signal indicates the following signal is a solid yellow. A solid yellow in turn indicates that the next signal is red, and to slow down to 1/2 the posted limit to prepare to stop.
Type 06 are Diverging signals and are used in conjunction with the beginnings of passing sidings when track goes from single to double. They have various indications such as Red over Green, which indicates a Medium Clear, and to take the right hand track.
There's another variant of these signals called Approach Signals, and these have a number board below the heads, just like the Type 05s. These are also called Distant Signals, and are used to indicate the upcoming signal indications of these so that the drivers can prepare to slow down if necessary.
Then finally there's the Type 08s or Interlocking Signals, which are used for wyes, and crossovers. These have 3-heads, which can display various aspects. Usually one head is always red on these signals.
With adequately spaced signals and by using the proper signals for the purpose, you can have relatively smooth driving. In general the spacing of signals is based on a few parameters.
1) The length of the train
2) The speed of the train
3) The number of trains
The length and number of trains generally factor into No. 2. With lots of trains following each other, there's a chance of having a follow the yellows scenario because each following consist will move no faster than the indicated signal. With trains following each other, there's a chance of running into a red signal due to a block occupied by another train, and with a block occupied ahead, each following train will be under restriction and running under yellows. If there are lots of shorter trains, this can mean a lot faster trains running within the route because each train will quickly clear the block ahead.
And finally, the longest train run will determine the signal spacing throughout the route. The problem is having lots of short trains running on a route with massively spaced signals can cause poor running times because the following trains will end up running up to a red signal while the train ahead trundles down the track and finally passes the signal ahead. The longer spacing of signals is also found on tracks with faster speeds because generally there are fewer trains running, which will run into this problem.
Working out signal spacing takes experimentation and experience. For Trainz I use the 2000T Coal consist, which is built in as my ruler to determine the signal spacing. For longer faster tracks, I use doubles, and for general commuter lines, I use the single consist.