Chairman Phil Gartside said: “Dougie is young and ambitious. When we met his enthusiasm and knowledge of the game was evident.
“He has a real drive and passion, and knows what we want to achieve and how we want to go about it. I am looking forward to working with Dougie to secure that."
Freedman said: “I am delighted to join Bolton.
“The club is geared up to getting back into the Premier League. There is an impressive setup and structure in place, and a first team squad of undoubted quality.
“I am excited about the challenge ahead of us.”
Freedman had been in charge of Crystal Palace for 21 months, taking over from George Burley in January 2011, under whom he had previously been assistant.
The Glaswegian initially helped steer the Eagles away from the relegation zone, and then in his first full season in charge enjoyed a memorable run to the League Cup semi-finals, toppling Manchester United at Old Trafford along the way.
The Selhurst Park club have so far made a promising start to the new season, with Freedman collecting the recent Manager of the Month accolade for September.
As a player, Freedman was on the books of QPR as a youngster before he later joined Palace, where he had two spells, registering over 350 appearances.
The twice-capped Scotland striker also represented Wolves, Nottingham Forest, Leeds United and Southend United, before taking up a coaching role at Palace in March 2010.