Paragraphs come in two styles. The first one is intuitive. It is taught in school for essays, so it comes natural when writing. This is the paragraph with a space above it. Such a paragraph is used in book formatting to break up sections, or indicate a change of topic or scene.
Another aspect is the size of the indent. Microsoft Word indents by default are 0.5". This tends to work in school assignments and on A4 or letter paper, but on anything smaller than a 6" by 9" book page, 0.5" is way too large. You need to go smaller.
On a lot of message boards and Facebook pages, people suggest 0.25" indents. Now, there is no one clear rule, so 0.25" can work in certain circumstances, but for the average traditionally published book page you are looking at no more than 0.15" to 0.2". So how do you know what you should do?
Learn something from this? Look at some of the books around you and see how they apply this rule.
Concerned you might be making other mistakes? You can buy our ebook "Formatting Your Book For Print" on the Kindle store.