Theory of a Block System and its Operation
That's the concept in a nutshell. Each block is guarded by a single signal at the beginning of the block. That signal will be red as long as there is a train in the block it guards. If the track ahead is clear, the signal is green.
In days gone by, each block had its own tower, which was manned all the time. When a train would enter the block, the signalmaster would switch the signal to "halt". When he got the "all clear" by telegraph or telephone from the signalmaster up the line (at the start of the next block), he would switch the signal to "go" again.
Blocks on the Layout
For each block signal, there must be one contact switch. These can be switching tracks or reed switches, even infrared light beams and mechanical switches. The diagram shows how these need to be hooked up, i.e. what function they need to perform on the signals.