Here's how.
Start composing your post.
Click on "Upload attachment":
Choose the file on your computer:
Back in the text of your post, put the cursor where you'd like the photo to appear.
Click on "Place inline"
When you choose "Place inline", you'll see a bit of computerese that looks like this:
[attachment =0]step3.jpg[/attachment]
You can copy and paste that anywhere in your post and that's where the photo will appear.