Firing torpedoes now is a mistake. Torpedoes are most effective within a two mile range once the speed and course of your target is clear. At the moment you don't know whether this is an ally or an enemy, nor do you know their course and speed. Torpedoes are not very effective at long range against fast maneuverable targets like destroyers or T-boats.

Opening fire with your main guns now is also a mistake. The enemy is within range but your guns are most effective at closer range once the speed and course of your target is clear. At the moment you don't know whether this is an ally or an enemy, nor do you know their course and speed.

Waiting for the ships to come closer and use your Aldis lamp to send a challenge is extremely risky. The ships would have to come within a kilometer or less for the signal lamps to be seen. At that range your ship would be in serious trouble if the enemy open fire with cannons or torpedoes.