No space confusion

For some while I've followed the fail blog site and the subsite that  deals with translation issues.   this is often amusing but also educational as quite frequently the translation issues  are English translations of Chinese signs.   As for example this one:

http://failblog.org/2009/08/15/lightswitch-fail/

The translation of 天花灯  as smallpox light seems obvious when looked up in MDBG as it lists the following definition

天花  = Smallpox / ceiling

So I can read the intended translation as "ceiling light"

However if I look up 花灯  I get

花灯  = coloured light

So maybe the Translation is "day coloured light"  or "day light" given the context.

Is this because of the translations in the dictionary I am using?  It is just that it seems nuclear to me how I would ensure I understand the intended meaning  and  how two readers would  be sure they were thinking the same.  In English the spaces between the words mark the boundary between the words but Chinese uses no spaces to define the gap.

For example if I write goatherding  when I mean waiting for the noise of a lady ringing a bell before leaving  I would came confusion.

I'm sure this is a confusion every English speaker approaching Chinese encounters but any insights into how I learn to  avoid these pitfalls would be welcome. I suspect the answer will be experience. . .