Nick - usually you have to host the image on a hosting site. www.photobucket.com is one a lot of people here use. Then at the bottom of the photo once you upload it you can copy the code for the location and paste it into your profile or message.
One thing with the red X is you don't have the complete code for the image location. there should be something after the <a href= as http:\\www.myimage.com or something...
also you usually can't link to someone else's page and have it show the image here. Try copying the image itself and loading it up to photobucket or something...