Filter Collection by tags in Menu

[Blufurr]

I have products which are in collections and then a tag to help narrow down the product category when i define a particular menu item.  I am using the latest version of the Trade theme.

I am trying to setup collections which are filtered by tags, and whilst I can set it up the filtering doesn't work when I click the menu option.  It still brings back everything in that collection rather than narrowing the results down to include items in the collection which only have the tag I defined in the Menu.

Does anyone know how this works? 

[Blufurr]

Thank you - that is extremely helpful.

In the filter solution, it requires the customer to then use the filter to reduce the list of products which I can use in other locations, definitely.  

However in this scenario the customer should only be shown certain products within a collection.  Having modified the structure of my tags and using the 'old school' method, it achieves the desired output, however I'm not one for sticking with an old solution if there is a newer and more efficient/better one!  Is there a way to use this filter scenario in my case?  So the user would click on a menu which would take them to a product page of that colleciton but it must only show certain products.   So as an example, a collection of books but the menu is 'red books' so the user should only be shown red books from the books collection.

Thank you!