You want to reduce your color depth to the number of colors you're using. The fabric can be one of those colors (i.e. white stitching on a black fabric). After desaturating (removing the color) from my image, I turn the contrast to 100% so that there are no shades of grey left. Just two colors: black and white.
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But the problem is a lot of tiny speckles that my software would make a horrendous mess out of. It can do a running stitch for an outline, but it can't manage a lot of dots - there would be a thread connecting them all in one giant mess. So you need to clean up your design. Connect areas of like color when possible (unless you know you'll need them stitched differently, i.e. separate directions).
After you import your design into the embroidery software it will automatically assign direction and stitch values that you'll probably want to modify. It doesn't understand what the image is of, it's only evaluating the efficiency of the elements. You will need to address each segment individually. Sometimes an element may not translate from the image at all and you'll need to go back to the previous step and modify your design.
Above are two screenshots of how my software "sees" the image - the first is before editing. Notice the crazy stitching around the left eye and some of the bizarre direction changes in his hair. Changes in stitch direction will reflect light differently and be very apparent. When in doubt, it's probably best to make everything go the same direction.
Then finally you're ready to export your design to the machine and test it out. You may realize you need to make revisions, but the goal is to have most of those worked out before you waste time and materials.
