How do colors apply to fantasy, you ask? Well, let's look at it as Photoshop would: tool-by-tool.
Second, we've got value. That's how much darkness each color has. To get a bit technical, a value of 50% is the pure color, the hue, that we talked about above. Black is 0% value. White is 100% value. Now this is all quite fascinating, but from a writer's perspective, the "value" tool has a practical usefulness. The levels of darkness (value) in each setting, each object, and even each character add depth and symbolism to your story. Obviously, a darker setting is more mysterious, more scary, more evil--in short, it's metaphorically darker. Tolkien's Mines of Moria were in deep darkness, which added to the spookiness and the sense of danger in the setting. Even objects that are darker in value seem to be symbolically darker in purpose. So play around with the value tool in your writing, and consider the levels of darkness in your story and how they affect the tale.
Third up is saturation. Saturation is the "purity" of each color. Again, to be technical, 100% saturation is the hue (pure color), and 0% saturation is white. Value measures from white to black; saturation only measures from white to hue (pure color). Why is saturation valuable for fantasy writers especially? Obviously, as with hue and value, saturation is great for adding a variety of memorable colors to your story (chartreuse, for example). It's also great for atmosphere in settings. Even further, though, one of the most fantastic parts of fantasy is that we don't have to accept the world the way it is. For example, what if your villain threatens to remove all the saturation from the world, making the world a colorless white? Or what if your world is colorless (0% saturation), and then your hero(ine) discovers color? It's fascinating to imagine the implications!
To sum up what we've been discussing, these three tools--hue, value, and saturation--together produce all the colors possible. Any color you can imagine (and a few that you probably can't) comes from a combination of hue, saturation, and value (commonly abbreviated HSB in physics textbooks and Photoshop alike). Use them to add detail, variety, mood, and the fantastic to your story.
One last comment about color tools: when in doubt, invert. Do the opposite of what you normally would. Give your villains something white to wear and hide the scary monsters in the light forest rather than the dark one. Have the villains attempt to unleash color on the unsuspecting population, and make your heroes defend the cause of 0% saturation! Consider making your hero's favorite color your personal least favorite. Each of these "unusual" choices will add a definitely unique flavor to your fantasy. Always experiment and invert!
There's a lot more to consider about colors in fantasy, so be on the lookout for part 2 coming next week!