I suggest you go to my website and look at my Crumpmaster and Hi Voltage characters since it's pretty much exactly what you are doing.  I follow the same process (film the video, break it up into key animation frames, remove the backgrounds from each frame in GIMP to get a set of "clean" images, assign a 256 color palette to them with index 0 being the transparency color).  I use Fighter Factory Ultimate for the character creation process since it is the best tool for character development (in my opinion).

3. Do a progressive and controlled reduction of image colors. You can start with 32bit, do some adjustments then reduce to 24/16 and then to 8bit with preferably a pre-made palette based of the character colors.

Is there any info on this here anywhere? Tips and/or tricks? Ive been searching and if so im not sure what to search for.

The Mugen project i'm creating only has original characters like this. process has been fun but i think im doing things wrong because of the many pallets that my char has even tho he is only 1 color.

anywho any info on this or to point me in the right direction will be much appreciated.