Indirect characterization is an excellent example of what we are taught about effective writing, which is "Show; don't tell." How that is borne out in the treatment of characterization should be clear, I hope, with some examples.
If I want to have a villain in a short story, I can write,"He was a very bad man." That would be direct characterization. I am telling the reader, directly, that this is the villain of the story. But if I show the reader that this character is behaving badly, that is indirect characterization. I might show him being cruel to his wife and children or to the people who work for him. I might show him committing some dishonest act, embezzling funds he is entrusted with. I might show him kicking the dog. I need not tell the reader he is the bad guy. I can show the reader, and this is generally far more effective. I might dress the character in dark clothing, which is another form of indirect characterization. I might give him dialogue that shows he is evil. I might indirectly characterize him by showing how other characters respond to him, moving away from him in conversation. There is a movie, the name of which I cannot remember right now, in which the bad guy in the story dies, and everyone leaves him lying there, simply stepping over him and ignoring him. That is indirect characterization at its finest!
A novel that contains mostly indirect characterization of its hero is The Great Gatsby. In the first chapter, Nick describes his first sight of Gatsby as Gatsby "...stretched out his arms toward the dark water in a curious way" (25). We have no direct characterization of Gatsby here, but we know he is yearning for something, and this yearning quality defines him without our ever being told that directly. We learn of Gatsby's character through his actions, through the responses of the other characters, and through details such as the descriptions of his parties. When Gatsby's father appears, at the end of the novel, and shares with Nick Gatsby's self-improvement list from Gatsby's childhood, we see Gatsby's character without anyone telling us anything direct.
As you read, take note of which authors directly characterize their characters and which do so indirectly. This is an important aspect of the appreciation of a literary text. It is also a valuable lesson in how to present characters in your own writing. Remember to show, not tell.