Local extension testing / documentation

This is a bug, or at least a lack of clarity, in the documentation.

Describe the bug
In step 5 of the custom extension documentation
pxt/docs/extensions/getting-started/vscode.md it says:

• Add an entry under dependencies that points to your extension folder:

{
    "name": "banana test",
    "dependencies": {
        ...
        "banana": "file:../pxt-banana"
    },
    ...
}

But it’s not clear how to make the relative file:../pxt-banana local file reference work.

Expected behaviour
Explain the directory structure, where pxt serve should have been run from and how this relates to the directory where pxt-banana is being developed.

or if this isn’t based on directories explain how to set up the development environment to make this work.

Environment:

• OS: MacOS
• Browser: safari
• Tools: node, pxt, vscode

Open docs/extensions/getting-started/vscode.md and inspect step 5, especially the file:../pxt-banana dependency example. Reproduce the local extension setup with pxt serve and verify how the project directories relate to the pxt-banana development folder. Done means the documentation clearly explains the directory structure, command location, and local reference setup.