Click on "Upload a file" under the editor window, you upload your image to the message then you can insert it. So you have three display options: Do nothing with the uploaded images (they show at the end of the post as attached files); Insert as thumbnail anywhere, just move the cursor then click insert as thumbnail; Insert as full sized image (same method).
It confused some of my forum members too, they did not realise you have to start the process by uploading the image to the post as a file.