Indirect characterization is where a reader must infer the characteristics of a character based upon dialogue, private thoughts, actions, and interactions with other characters. Indirect characterization is in direct opposition to direct characterization where the author directly identifies the characteristics for the reader.
To example, it is much easier to understand a concept when placed in comparison with a contrasting idea. Therefore, the following is an example of direct characterization.
Maddie was 16. Like the typical 16 year old, she tended to be quite self-conscious, but Maddie hid this well. On the outside she was talkative, interacted well with friends, and played every sport she could. Coming from a relatively poor family, Maddie knew how to adjust in life. Given her artistic nature, Maddie hid her poorness by making clothes which mirrored the newest trends.
On the other hand, the following description is an example of indirect characterization. Maddie is again described, but readers must infer as to her characteristics (which mirror the previous description so as to make the characteristics more easily recognizable). The text in parenthesis explains the inference which should/can be made.
Maddie just got her learner's permit (which would make her 15 or 16). To the world, she was quite positive about her self-image (which means she is internally self-conscious). She would mistakenly cut off people when they were talking (talkative), had no problems with any of her friends (got along well with others), and was known as a jock. Maddie's clothes were amazing and she had a great eye for fashion (speaks to her artistic nature).
Therefore, as seen above, indirect characterization forces readers to read into what they are being told by the author/narrator.