With stories such as this one that focus on mystery and terror, a good place to start with analysing how this fear and suspense is created is through setting. The narrator of this excellent story gives us a clear description of where the signal man lives:
His post was in as solitary and dismal a place as ever I saw. On either side, a dripping-wet wall of jagged stone, excluding all view but a strip of sky; the perspective one way only a crooked prolongation of this great dungeon; the shorter perspective in the other direction terminating in a gloomy red light, and the gloomier entrance to a black tunnel, in whose massive architecture there was a barbarous, depressing, and forbidding air. So little sunlight ever found its way to this spot, that it had an earthy deadly smell; and so much cold wind rushed through it, that it struck chill to me, as if I had left the natural world.
Here you have all the classic ingredients for a perfect horror story. Note the solitude and darkness, the way that this place is almost shut out from the natural world. The narrator uses a metaphor comparing it to a "great dungeon." The only light apart from the "strip of sky" is the eerie, "gloomy red light." Note how the black tunnel is described as "barbarous" and "forbidding." The smell of this place is of "death" and it so chills the narrator that he has the sensation of leaving the "natural world."
Here we have then a perfect example of how setting is used to create fear and suspense, foreshadowing the supernatural events that are to follow in this great story.