1) click on the Insert Image icon. A dialog box will open and you give it a URL. This implies your picture needs to be hosted somewhere and is accessible via a URL.
2) Click on Go Advanced when making a post. Then you will have a "Attachments" option (paper clip icon with arrow down). A dialog box opens (which has a explaination of what size attachments can be at the bottom) where you can "Choose File". Use that and browse and select an image. Then click on upload. You can also use this to remove pictures. Then you can close the dialog box after upload. To see your picture, use Preview Post after closing the Attachments dialog box. Also when you click on Attachments, the drop down will also have your attachments listed. If you click on one of them it will enable you to specifically manage the attachment - try that out and you will see how it works.