A lot of people on FSM use Flickr. It's not the only site, but I'm using it for an example.
You create an account on that site. They allow you to load yur image (typically) files there. They are the "host" for your files.
When those files are there, you want to set their status to "Shared." Select an image to include. Usually there is a handy "get link" or "save image location" button; sometimes you just right-click the mouse. You can use CTRL+C or a mouse click to save that link.
Going back to FSM, you select where in the reply you want to place the image. Then click on the fifth icon in the bottome row, whic hlooks a bit like a mountain.
When that opens, the top entry box will be highlighted, use CTRL+V or right click and Paste to put the link in the Source box.
You can control how wide an image is using the width dimension on the bottom row of the image insert box. then you are done.
Now, I'm old and remember all too well the days before cut-n-paste drag-n-drop document creation. So I will "slug" the response with giberish text with gaps so I can compose the thing better.
sadgfsafg<<< that is a "slug" text. The below image is 600 pixels wide.
asdfasf<<<< anther slug; were I cleaning this up, I'd over write that with body text
Image below 500 pixels wide
asdfsf<<<another slug. Image below 400 pixels wide.
Now, Kalmbach's responce box tends to paragraph your text if you use the Enter/Return key, and not, if you just run the text to its textbox limits. You can actually force a LineFeed (single space, not double space) byt using CTRL+Enter. That is how you can get images to fit tight to body text if you so desire.
Hoe that helps some