That black hose going into the side of the valve is going to the pump, correct?
Port one is the skimmer, so in that position, the pump will draw water to through the skimmer, push it through the filter and return it to the pool. I can't tell from the photo of the white, corrugated hose running into the pool wall where it runs to. Does that hose come from the filter? If so, that is where the water returns to the pool.
So, the other hose that is exiting the bottom of the pool must be to the drain on the pool floor. Typically, you will want to leave the valve on "full" in the Port 1 (skimmer) position. However, you can switch to the other position, which allows the pump to draw water from the drain, and brush that dead algae and other stuff into the drain to be filtered out. Just be careful, there's a lot of it, and may clog the filter up fairly quickly. Watch your pump pressure.
The pump should always be off when you change positions on that valve.
Now that you have primed the pump, you may want to fire it up to see if you get flow through the return and pressure at the filter.
Also, have you confirmed that there is sand in the filter?