(First steps removed as you've done them)
4.) Go back to Album, click on thumbnail to open full size image. Right click (Windows); Control Click (Mac) and select "copy image location" (its URL).
5.) Return to your reply window in the thread and click on the IMG button at the top of the compose window.
7.) Paste the image location into the window and click OK. (You can paste over the existing http://)
Images tend to be smaller than hosting site's size, but can be full sized if you remove the pixel limitation, (-600x360)— the numbers and the dash preceding, leaving no spaces, and ending in .jpg