This happens because your image files have pixel dimensions which are greater than the video frame size.
Right click on the clip on the timeline and click on "Scale to Frame Size".
Your image will still be cropped and/or letterboxed, if it does not have the same aspect ratio as your sequence.aspect ratio.
You simply drag the transition that you want from the Effects panel onto the join between the two clips in your sequence. Your clips will need to be trimmed to provide "handles" for the transition to work properly. If the transition duration is, say 30 frames, then you will need an extra 15 frames in each clip beyond what is visible on the timeline.