I updated the installation information and custom settings on top a bit.
Please give feedback if i'm unclear in the description, so i can change it.
The slider does use the pictures which vb4 stores in the databasefield "previewpicture" and resizes them. You do not need to manually add images except 1.
You need a fallback image if your article does not have a previewimage (or something goes wrong during resizing), then the fallback is shown.
If you want certain effects you have to edit the nivo slider options:
http://nivo.dev7studios.com/
Usage tab - options, there is an explanation given.