There are 2 main steps to using a picture in a discussion reply in Canvas.
1) Upload the picture to your "My Files".
- Do that by clicking Account | Files.
- Click "My Files" on the left.
- Click the "Upload" button in the upper right.
- Select the file and click Open. Your file is uploaded.
2) Insert the picture from your "My Files".
- Click Reply in the discussion
- Click the image icon (looks like a mountain)
In the Image Source window click Canvas, then My Files, then the desired picture.
Click Update, and the picture is inserted.
Here is the official Canvas documentation: