It can be confusing working out what is going on in freestyle mode so here is a quick walk through...
Freestyle palette editing is intended to be a way of colouring an image in an intuitive fashion with the minimum of keyboard usage. In fact everything is controllable with the mouse, as the following shows:
To start with, generate a plasma type fractal as it has all 256 colours on screen at once. Now bring up the palette editor and press 'w' to set up a greyscale palette as a blank canvas on which to splash some colour. Pressing 'f' puts us in freestyle mode... crosshairs appear on the screen and a colour band is applied, centred on the cursor. Although, at the moment, the colour of this band is grey and you will not see much!
In order to change the colour of the band, hold down the left mouse button and drag up and down. This changes the amount of red in the band. You will see the values change in the status box above the palette grid. Double clicking the right mouse button changes the colour component that is varied in an r-g-b-r-cycle. Try it out and conjure up any shade you like!
To vary the width of the band, drag up and down with the right button held down. Slower machines may show some 'lag' during this operation, especially if they have no math co-processor, so watch out as the mouse movements get buffered.
Once you have got the band in a satisfactory position then double click the left button to fix it in place. Continue like this for as long as you like, adding different colours to the grey palette. You will notice how the band relates to the existing colour, the RGB values give the middle colour which are then smoothly shaded out to the colours at the ends of the band. This can lead to some sudden jumps in the shading as the band is moved about the screen and the edges come to overlap different areas of colour.
For really violent jumps in shading try starting with an image that has areas that change chaotically, such as a Mandlbrot set. You will see what I mean when you move the cross hairs into an area close to the 'lake' where the change in value from one pixel to the next is sudden, chaotic and large. Watch out! The strobing effect can be somewhat disturbing. This is nothing to worry about but just a consequence of the manipulation of the palette and the way in which the colour bands are calculated.
I hope that you will find this a useful tool in colouring an image. Remember that the 'h' key can be used to hide the palette box and expose the whole image.