This article is from the sci.fractals FAQ, by Michael C. Taylor and Jean-Pierre Louvet with numerous contributions by others.
The problem with true-colour rendering is that computers use a
3D approach to simulating 16 million colours. The basic components for
addressing true colour are red, green and blue (256 shades each.)
There is no logical way to determine an one-dimensional index which
can be used to address all the RGB colours available in true colour.
Palettes can be simulated in true colour but are limited to about
65000 colours (256x256). Even so, this is enough to eliminate most
banding found in 256-colour fractals due to limited colour spread.
Because of the flexability in choosing colours from an expanded
"palette", the best rendering methods will use a combination of level
curves and exit angles. While escape times can be fractionalized using
interpolated iteration, the result is still very flat. One promising
addition to true-colour rendering is acheived by accumulating data
about a point as it is iterated. The data is then used as an offset to
the colour normally calculated by other methods. Depending on the
algorithm used, the "filter" (sic: Stephen C. Ferguson) can intensify,
fragment or add interesting details to a picture.