The Proxy works between the client and the web server. It receives the requests from the clients, communicates with the web server on behalf of the client, receives the request back from the web server and passes it back to the client.
Modify your browser proxy settings so that it isset to the proxy. The proxy listens to the port for incoming connections. On receipt of a connection from a client, it opens a socket for communication
After the proxy gets the reply from the proxy server, it writes back on the socket it had opened with the client.
You will also need to configure your web browser to use your proxy. This depends on your browser. In Internet Explorer, you can set the proxy in "Internet Options" in the Connections tab under LAN Settings. In Netscape (and derived browsers, such as Mozilla), you can set the proxy in Edit->Preferences and then select Advanced and Proxies.
In both cases you need to give the address of the proxy and the port number which you gave when you started the proxy. You can run the proxy and browser on the same computer without any problems.