The game takes advantage of the Wii's motion-sensitive controller, along with the Nunchuk attachment, to control a katana and a firearm. The on-screen gun hand points the gun in the same direction the Wii Remote is pointing. Players can push objects to use them as cover by pushing the controller forward. Shaking the Nunchuk attachment or pressing "right" on the D-Pad reloads the gun. The player can also throw grenades underhand or overhand by moving the Nunchuk as though it were the actual grenade.
The AI characters can "care for themselves" according to project leader Roman Campos Oriola; enemies are aggressive, moving around objects and the environment to attack the player (like jumping on a table instead of running around).
The AI allows enemies to surrender, rather than fight to the death. The player can shoot the weapon out of an enemy's hands, causing him to raise his hands in surrender. Alternatively, disarming the leader of a mob of enemies will cause the entire mob to surrender. Once an enemy has surrendered, the player has the option to either shoot the opponent or direct him to kneel with hands behind his head by waving the gun at him. In the sword fighting aspect, a similar option exists. After winning a sword fight, the enemy gets on their knees and the player has the choice of whether to deliver a coup de grace or to show mercy. In both sword and gun fights, sparing a defeated enemy essentially removes them from the gameplay, and they can no longer attack the player nor be hit by gunfire. In addition, the player is awarded respect points. Slaying an enemy who has surrendered has no gameplay benefits.
Recklessness is discouraged by limited ammunition supplies and a system that adds "freeze points" for accuracy/efficiency while using one's weaponry. When a certain number of points is accumulated, the player is able to momentarily freeze time, thus allowing for more accurate attacks.
In story mode and multiplayer "Killer" matches, the remote acts as a telephone using its internal speaker. It rings for the player to place it against their ear. The mission objectives are then given without the other players being able to hear what they are.
Up to four players can play together on four different maps: Dojo, Restaurant, Games, and Docks. The multiplayer mode is split-screen with traditional deathmatches. According to the project leader, "perhaps most impressive is the fact that although split-screen reduces the amount of on-screen space you are playing in, you don't have to make smaller movements —you can gesture as wildly as you want, and it won't interfere with the other player's on-screen quadrants".
Red Steel features three multiplayer modes: Deathmatch, Team Deathmatch, and Killer:
- In Deathmatch, each player fights independently and must score as many kills as possible to win.
- In Team Deathmatch, the players are in two teams. The team with the most kills wins.
- In Killer, each player fights independently. This mode consists of rounds. At the beginning of each round, each player receives a secret objective through the speaker of the Wii Remote. A timer is set that defines the duration of the round. The first player to complete the objective wins the round. Depending on the difficulty of the round, players will be rewarded different quantities of points. Killer mode is only playable with four players.
Another feature of multiplayer is the notion of "bonuses". Before beginning play, each player chooses one of three bonuses: More Damage, More Life, or Unlimited Ammunition. During play, the bonus meter increases for each enemy killed. Once the gauge begins to fill up, players can press the "1" button on the control to activate their selected bonus for a period of time proportional to how full the meter is.
There is no multiplayer mode for sword fighting.