Get a photo editing program...or use MS-Paint or Apple-whatever, or GIMP.
Size the image according to what the "set avatar" dialog says for you... Probably 150x150.
When saving it, save it as a JPG file and reduce the quality until it is 5kb (or whatever size limit the dialog says for you).
Then set your avatar.
The limits are slightly different depending on if you're a supporting member. However, what happens is that if the pic you set your avatar to is bigger than the limit, THE FORUM SOFTWARE SHRINKS THE FILE for you...and you end up with a small avatar. See?