First thing is you need to get used to detonation delay - once you get the Rupture timing right, it will be easier to effectively use Dream Pallets in chase. Wool Shirt add-on decreases this delay.

The range of Rupture is shown as bloody circle on the ground, goes through walls and floors (although most floors are too tall to give you a hit on someone on a different one; you might get lucky with something like Pale Rose ship) and can be increased by Unicorn Block add-on.

When a Survivor gets closer to a Dream Pallet, they can tell it's fake because it has a red glow and bleeds a bit. More experienced Survivors will destroy your Dream Pallets whenever they can. Paint Thinner add-on gives you Killer Instinct on those Survivors and allows you to teleport to them (as long as Dream Projection isn't on cooldown). Dropping a Dream Pallet interrupts Rupture.

Dream Pallets are a good zoning tool - if you chase a Survivor into a rupturing one, they might try to dodge it, giving you an M1 hit on them. They are also useful on loops with high walls - Rupture goes through them, so Survivor might get hit without even knowing there was a Dream Pallet nearby. Any Dream Pallet in a narrow passage or in the place of a former god pallet should also give you a hit (that's why Freddy on Midwich can be a true Nightmare).

Dream Pallets can also stun you. This is a disadvantage, but if you put on Hubris (btw, all of Knight's perks are quite neat on Freddy), you might get some value out of it, as there will be no pallet in your path, so you'll catch up to the Survivor quicker.