This is one accessory that needs to run on track power.
The bulb should be at track voltage(from outside the insulated block). When the loco enters the controlled block and stops, the bulb should actually get slightly brighter as the motor turns off(or nearly off) and dim again slightly when the contact closes and the loco takes off.
As the opposite is happening, you obviously have the bulb power tapped off of the insulated block instead of the rest of the loop. Only terminal 3 should be connected inside the control block... to the "1" clip on the Lockon.
Here is the diagram: