There are 3 levels of color in SWMUD: 256 colors, 16 colors, and no colors. Which one you use will depend on your preference, and the capabilities of your client program. Here are the commands to try them out:
|256 colors||set colors 256|
|16 colors||set colors 16|
|no colors||set colors 0|
You should start at the top (256 colors) and work your way down if your client program doesn't display correctly.
While you're at it, you can turn on combat colors, which will show combat messages with colors indicating how much damage was dealt:
set combat color on