The first time you launch Knossos, it will first ask you to select a directory where it can save stuff (like installed mods). You should use an empty folder for this. Then it asks you to select an existing FS2 installation, you can select your FSO folder (where the fs2_open...exe files are) and Knossos will copy all retail files from there into the folder you selected before. After that, it'll never use your FS2 folder again so you can move or delete it if you want to. If you move or rename your first folder, you'll have to go to Knossos' settings and correct the data path there.
Now you should be able to install and play existing mods. Make sure this works. If it doesn't, make a new thread or post in the Knossos thread (or go to Discord) and we'll help. Once you've got that working, you're ready to add your mod to Knossos. Go to the development tab and press the "Create Mod" button. We also have a guide
which explains this process in more detail. It should be fairly complete but let us know if there's anything missing or incorrect.
Once you have your mod in Knossos, you can use the FRED button on the dev tab (or in the dropdown menu on the home tab) to launch FRED.