Okay, part two of this faq will now help you properly setup your overview coloring. Coloring helps you in many ways as the filtering is not exact. It is common for ships to appear neutral if your color tagging is not properly set up. If it is setup properly, only neutrals should ever appear neutral. (Circular sentences, sue me.)

As we can see, in this first part we need to pretty much check everything. Now some parts of color tagging depends on the standings you, or your corp, set with other players/corps. I am not going to cover how to set standings here today.
However it is important to properly set this up and not just for the overview. These color tagging rules get applied to conversation channels. This is a powerful intelligence feature. When you are in local, scan the player list in local channel. Quickly identify targets and non-targets. When you might happen to be in some other channel, be able to quickly id your enemies and those you don't know (who might be more hostile than your enemies).
Even if you are unsure that this applies to you, apply these settings. You will thank me later down the road. (Checking "use small color tags" is a personal choice. I use it but I repeat, it is a personal choice only.)

Here is where we get into some real useful overview features. This will highlight targets with the backgrounds listed on the options. It will make your screen filled with colored blobs, of course, however on the overview it becomes much much easier to identify targets with this setting on.
The settings that I am suggesting here; we want to see pirates who are not set to friendly with us, we always want to have enemy militias colored, and we always want to see those who are at war with us.
This last option seems redundant and it very well may be. However given the track record of bugs, feature breakages, and exploits redundancy is good.