Earlier this week, the Eagles manager had to tell two of his summer signings - striker Stephen Dobbie and defender Florian Marange - that they had missed out on places in his 25-man Premier League squad.
Owen Garvan and Aaron Wilbraham were also omitted by Holloway, who believes the summer window makes planning ahead increasingly difficult for clubs like Palace, whose promotion via the play-offs left them playing catch-up in the transfer market.
"It is utter madness," said Holloway.
"Clearly, the rules have been brought in to guard against the top clubs stacking and racking players because they have the finances to do just that.
"But when I signed Dobbie and Marange, I can promise you that I did so in good faith."
Holloway has explained in his Sunday Mirror column that he made signings earlier in the summer in case he was unable to make recruitments later in the window.
"I had no idea when we did the deals for Stephen and Florian that we would be able to conduct so much business in the final few days of the window," wrote the Palace boss.
"Because of time constraints, we weren't able to do the kind of due diligence on new players as the rest of the division. I learned during my one season in the Premier League with Blackpool that there is no room in the top-flight for sentiment."
Despite having to let down the likes of Dobbie and Marange, Holloway is optimistic that Palace have a squad that can compete in the Premier League.
He added Cameron Jerome, Barry Bannan, Jack Hunt and Jimmy Kebe in the final few days of the window, and added: "The key now is to knit these new boys into our squad.
"But at least I feel that we have given ourselves a fighting chance."