Okay, so firstly, I use
GraphicsGale. It's better and easier to use than Paint, especially because it has layers.
I start off with a few references and make a rough sketch in light brown. I usually play around with this before I get a pose I like, and don't worry too much about accuracy because the old sprites didn't stick to pokémon's proper designs. Note how I intentionally included two tail spikes instead of one; it's a subtle difference, but it's a difference nonetheless.
Next, I go onto the top layer (the square borders are on the bottom layer, the sketch on the second layer and the lineart/colour on the top one) and solidify the outlines. Note I've missed a few sketch pixels because I didn't think they were necessary.
Then I grab a Blue/Red/Green sprite that shares the same colours or close to the colours I want to use for the sprite. This time, I chose tauros, although I ended up editing the colours so they're not actually the tauros' colours at all. xD I also began to start the shading progress, which involves black for darkest shading, white for lightest, and a lot of dithering. xD
I continue on until I've shaded all the parts I think it needs, making it pretty ridiculous. Which is what I want, because old sprites were like that. Using pixels outside the outlines is always a good idea, and gives it that very old "Blue/Red/Green" look.
And voila! The finished sprite:
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