There are 2 main steps to using a picture in a discussion reply in Canvas.

1) Upload the picture to your "My Files".  

  1. Do that by clicking Account | Files.
  2. Click "My Files" on the left.
  3. Click the "Upload" button in the upper right.
  4. Select the file and click Open.  Your file is uploaded.

2) Insert the picture from your "My Files".

  1. Click Reply in the discussion
  2. Click the image icon (looks like a mountain)
  3. In the Image Source window click Canvas, then My Files, then the desired picture.

  4. Click Update, and the picture is inserted.

Here is the official Canvas documentation:

How do I embed an image in a discussion reply as a student?