I am really loving having the Applications Palette in KM.
It has become really central to my workflow.
Is it possible to add folders to the Applications Palette?
Just folders that I like to frequently access, not currently open folders.
I know it's the opposite of the purpose of the Applications Palette, which only shows open applications (which I do love!), but just the way I have been working lately it would be nice to access folders I like in the same palette.
Or should I try to replace the Applications Palette with some kind of custom palette?
You could certainly create you own palette to add favorite folders. Keyboard Maestro palettes can be launched in a variety of ways. For more information, see: Palettes [Keyboard Maestro Wiki]