The next step is not that hard to imagine. You must click the button 'Choose an image' and upload your image file.
Please note that you can not upload ico files, you must upload a png, or a jpg, preferably 16x16 for best resolution.
Do not forget to SAVE your theme. The save button is both in the footer of the theme screen, as at the right top of the theme creation screen.
Once you clicked save, head over to your webshop, and the favicon should show after you refresh the page. If it doesn't immediately shows up, wait 2 minutes so the caching of the old favicon is expired.