You have to put the picture into an online archive (such as photobucket) first, then you can link to it as described above. You can't link to a picture on your own computer.
For example, I've put a picture into my archive on Photobcket, so I can put in a link to it like this
http://img.photobucket.com/albums/v336/MarcusRowland/planet.jpg Doing that means that you won't see it unless you click on the link. Alternatively I can use the image button and paste that link into it and have the pictue show like this
Hope that makes it clearer.