If it's telling you your file is too large, then the file is too large. You need to edit your file in an image editor to shrink it down. Since filesize is the issue, you can get away with just adjusting the compression on your file, as opposed to resizing the image dimensions.
GIF and JPG are types of image files. GIF is a format which allows for animations, while JPG has better overall compression in terms of resulting file-size. GIF format is better for preserving images with large areas of a single color.
When the program tells you that you can only use GIF and JPG, it means that other image formats (like BMP and PNG) are not allowed, nor are non-image files. Ergo, pick images that have file extensions of .gif, .jpg, or .jpeg to upload.
If you don't have an image editor that allows you to adjust the compression ratio on your image, and don't have one that allows you to resize, then you can always upload your image to a webhost (if you have one), and then use the IMG button to paste the URL of the image into your post.
-Kat
