Make sure you have set up your notes file in NoteCaddy by going to file->settings->color settings. It is the file notes.yourScreenName.xml for PokerStars.
Colors will be added to your PokerStars, Full Tilt, and OnGame clients for each player that meets the criteria of at least one color definition. These color definitions are always listed at the bottom right of the NoteCaddy client. If a player meets more than one criteria, NoteCaddy will assign the color of the definition with higher priority. Keep in mind that for priority, 2 > 1 so it is the number that is literally bigger. Any color definition that has "exclude from color coding" specified will be ignored. Furthermore, any color definition that doesn't have a color specified will be ignored for PokerStars. If no icon is specified for OnGame, it will be ignored there.
The drop down lists that contain the colors for each site will only appear if a notes file is configured for it via file->settings->color settingsYou can test how many people will get a certain color by right clicking it and clicking "seek". This also works if you select multiple colors (either using shift or CTRL) and running seek on them.
For further testing and trouble shooting instructions, please see
Color coding not working as expected? Read thisTo create the actual colors, click the outlined button on the start panel.
You have to run this process whenever you want the colors to be updated in PokerStars, Full Tilt, or OnGame. The PokerStars, Full Tilt, or OnGame clients must also be closed for this process to run. That means when you start the process and until it has completed. If one of them is open, the changes will be lost when you close it.