In order to have something be transparent you need to have an alpha map that is white where you want the model to show, and black where you don't want it to show. When i made my muzzle flash the other day I just added an alpha channel which was automatically white where the flash was and black everywhere else. Save this as a .tga and make sure to select Keep Alpha Channels.

Then in MED go to edit -> manage skins. Then click skin editor and under texture select the .tga and under Texture Settings or whatever make sure to check off the alpha box.

That was probably pretty confusing since I just kind of rambled from memory but it should be alright to figure out. If you don't have Photoshop I'm sure there is another way to do it but I don't know how.