Get your project working so typing ghcid in the project root works. If you need to pass special flags to ghcid create a .ghcid file in the project root with the extra flags, e.g. --command=cabal repl or similar.
Run the VS Code command (Ctrl+Shift+P) named "Start Ghcid".
These steps cause ghcid to be spawned as a fresh terminal, errors to appear in the VS Code Problems pane, red squiggles in the editor. Even though the errors are in the proper problems pane, I personally still prefer the output provided by the ghcid terminal, so still look at that.
Other available commands
In addition to having the extension start ghcid itself, if you have to start ghcid in a special way, you can attach the extension to a running copy:
Run ghcid -o ghcid.txt which will produce a file ghcid.txt which updates every time ghcid updates.
Open ghcid.txt in VS Code as the active editor. Run the VS Code command (Ctrl+Shift+P) named "Watch Ghcid output".
Shows errors and warnings from Haskell in the Problems pane and inline in the document. Updates when files are saved.