Music Composers Unite!
You have a lot of question packed into that some paragraph, makes it a little harder to tackle what exactly is confusing you.
It sounds like you havent gotten to chord functions yet. In Diatonic Functional Harmony, all chords have a function and wish to go to another. Chord progressions are a play between tension and resolution. The function of you diminished chords is to resolve to a more stable major or minor chord.
This is true for all seven chords in a key, using roman numerals i can show you (if you remember that link I shared with you before, they cover roman numerals)
You have your I chord or your tonic, which is the center of all this. When it starts a piece it can go to anything.
You have your wild card chord III your mediant chord. I can act as a stepping stone to the next set of chords
Your pre-dominant chords which are your ii and you IV chords. They prep us for the next set of chords
The dominant chord are your V and viio chords. They set everything to go back to the tonic or I chord.
SO a chord progression could look like this
I, iii, IV, viio, I
Of course this is just the simplest of chord progressions, the more you look into this and study the more complex they can become.
For more links check out this thread, it may help clear up any other question you may have:
A fun exercise is to invent a melody comprised mostly of eighth notes.
Next, invent a four-note chord for each eighth note. Try various instrumentations or just use
one instrument, like a piano or strings...
may I add to the above that you can open a random piece of (instrumental-and my choice would be classical) music, take a theme that doesnt modulate (change key) and add some chords below. You can even take a piece unknown to you, so that your memory doesn't interfere... A good source of sheet music is www.imslp.org , you will find tons of royalty free sheets to study.
There are also books for harmony with excercises-themes that you have to put chords to. You can propably find one at a local library.
Study the links Tyler posted and then try each thing you learn, try different thing for the same role and see how they work.
Although it is important to have a grasp of tonal/functional harmony, writing in keys is a "box" that you should break out of as soon as possible.
For me, studying Lyle Murphy's Equal Interval System (EIS) has been instrumental in understanding the architecture of music in a completely new and original basis. I think of it as the "unified field theory of music" in that EIS confirms all the stuff that is found in the traditional/tonal systems and yet it is not limited by key centers right from the very beginning.