Indeed, the multiply setting with brush tool is not (at all) the best approach when coming to pixel art. Simplest shading needs only 3 colors : base, shadow and light (ofc you can have less, or more, but that's a more advanced process -imo-).
"Smaller" is not the right word, in fact you want to work with 1:1 scale (1 square on picture is 1 pixel). Other scale would lead you to a bunch of mistakes.
The base of your character is great, so if you work on this color problem, you should come up with something good pretty quickly