Recycling my garbage.

[Omegakyogre]

1. A square of red next to a square of blue = lots of contrast
A square of green next to a square of blue = contrast
a square of light blue next to a square of darker blue = a little contrast
a square of blue next to a square of blue that's ALMOST the same color = very little contrast
As a general rule, you want 'a little contrast' or 'very little contrast' (Almost ALWAYS somewhere in between) when shading one color. If you make shading have any more contrast than that, it looks weird: The dark shading on Mallow's arm next to his normal color has way too much contrast.Typically you try to avoid lots of contrast in any case, shading or otherwise, unless there's a color in between the two that makes the transition smoother.
2. Jagged shading means just that: The edges of the shades are jagged; they don't look smooth. Try to make curves as smooth, consistent, and subtle as possible.

With regard to your shading question, I made a small example, and slightly changed Mario to fit with my example:


You don't want to shade both sides of a sprite, because that's pretty much pillow shading, but you CAN put a darker shade on the other side when you 'anti-alias', which basically reduces the contrast between an outline and its inner color. (You CAN anti-alias outlines with backgrounds, but it requires transparency to work right and is frowned upon with sprites.)