The Node.js test runner only supports running JavaScript files. If you have a compilation step, you'll need to make sure that runs with sourcemaps so we can figure out where tests appear in your source code. For example, for TypeScript, set "sourceMap": true in your tsconfig.json.
If tests aren't initially found in your workspace folder, this extension won't keep watching for changes. Manually run the "refresh tests" action if you later add some (or just reload your window.)